After Fintech, there has been increasing talk in the past year about Regtech. But what does Regtech actually mean, and when is it used? Is Regtech really “the next big thing” in the finance industry? Regtech is the fusion of the two words “regulatory” and “technology”. With Regtech, finance service providers can manage compliance tasks through an automated process. Since compliance is so expensive for the financial services industry, could Regtech be the answer to questions about regulatory efficiency?
In our first blog we explained what Regtech means, what value it adds, and whether Regtech is a form of Fintech. In this blog we will focus on the history of Regtech, why banks are focussed on Fintech and who develops Regtech.
4. Is Regtech new, or has it existed before?
Technological support for the execution of regulatory tasks is not new in Switzerland. The most successful product launched in past years is BearingPointFiRE , which focuses on calculation and reporting of capital requirements.
In contrast to Fintech, Regtech is, in fact, no real innovation. However, technological developments have made it possible to address increasingly complex issues and processes through Regtech. Investigations at several financial institutions in connection with financial scandals involving international bribery and in areas such as trading have revealed weaknesses in the daily monitoring of regulations that Regtech could address.
The innovation in Regtech solutions, the challenges financial institutions are facing as well as the relevancy of the topic due to increasingly complex and data-intensive regulations have shaped the term “Regtech” and led institutions to look into this topic in much more detail. Due to the high dependency on (global) subject matter expertise, it will be critically important for the further development of Regtech that large auditing and consultancy companies should address the issue and start actively to offer solutions.
5. Why are banks focussed on Fintech?
Fintech solutions have so far been mainly focusing on simplified processes such as querying account balances or executing payments whereby the Fintech supplier finds the best digital solution for the problem (e.g. mobile payments).
As a result, Fintech solutions can be experienced directly by the customers of banks and provide a real perceived benefit, although it has to be mentioned that these processes have already been automated internally to a large degree. The added value of such solutions lies in the use of new technology that is not already deployed by the banks, the speed of development as well as the nature of the solutions.
Due to the fact that Fintech solutions are visible for the clients of banks, they allow early adopters to benefit and use Fintech solution as differentiating factor against their market competitors. This results in increased pressure for all market competitors to stay up to date with the latest Fintech developments which could be observed during the increasing development of banking apps.
6. Who develops Regtech?
The fact that Regtech does not primarily focus on technology, but on regulation, leads to a new type of supplier in this market.
Smaller local Regtech suppliers provide solutions which are limited in their capabilities, because their solutions can only automate low complexity tasks and consequently have to exclude complex regulatory aspects. As a result, only a limited reduction of efforts can be achieved.
As a rule of thumb, it can be said that 80% of the transactions (which are in focus of such solutions) are currently processed with 20% of the total work effort, but that the remaining (more complex) cases trigger 80% of the manual effort. A further problem is that many of the regulatory problems are not answered by automation, but this should be the main reason for the existence of Regtech.
For the automation of complex cases, specific regulatory frameworks are needed. These require data (regulations) which must be retrieved through and interpreted by a global network. The capability to access and interpret this data resides with regulatory consulting and auditing firms that perform their services in a global context.
As a consequence of the above, a Regtech provider is either a consulting company or a tech provider who has entered into a partnership with such a company. A purchase of the data and therefore a pre-financing of the related costs does not seem economically feasible.