What is 'Regtech'

Regtech is a blend word of 'regulatory technology' that was created to address regulatory challenges in financial services through innovative technology. Regtech (or "RegTech") consists of a group of companies that use cloud computing technology through software-as-a-service (SaaS) to help businesses comply with regulations efficiently and less expensively.

Breaking Down 'Regtech'

The aftermath of the 2008 financial crisis brought about an increase in regulation in the financial sector. Concurrently, there was a rise of the disruptive use of technology within the financial sector. Technology breakthroughs led to an increase in the number of fintech companies that create technology-driven products to enhance the customer experience and engagement with financial institutions. The reliance on consumer data to produce digital products has led to concerns among regulatory bodies calling for more laws on data privacy usage and distribution. The coupling of more regulatory measures and laws with a more technologized sector brought about the need for regulatory technology.

As of mid-2018, deregulation in United States — as seen in the unwinding of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) rules — has led to a slowdown in regtech company financing deals, though the compliance burden should still fuel the drive toward greater automation.

Regtech: How it Works

Regtech companies work in collaboration with financial institutions and regulatory bodies, and utilize cloud computing and big data for sharing of information. Cloud computing is a low-cost emerging technology that has opened up a world of new possibilities including the ability to share data quickly and securely with various entities. A banks that receives huge amounts of data may find it too complex, expensive, and time consuming to comb through. Using tools such as predictive analytics, a regtech firm can combine the complex information that the bank has with data from previous regulatory failures to predict potential risk areas that the bank should focus on. By creating the analytics tools needed for these banks to successfully comply with the regulatory body, the regtech firm has saved the bank time and money. The bank also now has an effective tool to comply with rules set out by financial authorities.

Regtech is an emerging community of tech companies that solve challenges that arise from a technology-driven economy through automation. The rise in digital products has increased incidences of data breach, cyber hacks, money laundering and other fraudulent activities. With the use of big data and machine learning technology, regtech reduces risk to company’s compliance departments by offering data on money laundering activities conducted online; activities which a traditional compliance team may not be privy to due to the increase of underground marketplaces online. Regtech tools seek to monitor transactions that take place online in real time in order to identify issues or irregularities in the digital payment sphere. Any outlier observed is relayed to the financial institution to analyze and determine if a fraudulent activity is taking place. Institutions that identify potential threats to financial security early on are able to minimize the risks and costs that are associated with lost funds and data breaches.

Regtech Applications

Regtech operates in various spheres of the financial and regulatory space. A number of projects that regtech automates include employee surveillance, compliance data management, fraud prevention, and audit trail capabilities. A regtech business can’t just collaborate with any financial institution or regulatory authority as it may have different goals and strategies in place that differs from the other parties. For example, a regtech that seeks to identify credit card fraud in the digital payments ecosystem may not find it worthwhile to pair with an investment firm that is concerned with its employees’ activities online or the SEC (Securities and Exchange Commission) whose current issue may be an increase in insider trading activities.

Regtech Examples

Some example of notable Regtech companies and the tools they have created include:

  • IdentityMind Global: Provides anti-fraud and risk management services for digital transactions by tracking payment entities
  • Trunomi: Securely manages the consent to use customer personal data
  • Suade: Helps banks to submit required regulatory reports without disruption to the banks’ architecture
  • Silverfinch: Connects asset managers and insurers through a fund data utility to meet Solvency II requirements
  • PassFort: Automates the collection and storage of customer due diligence data.
  • Fund Recs: Oversees how data is managed and processed by the fund industry (reconciliation)
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