RegTech is more than just a buzzword in the global financial and compliance community. So what is RegTech and why is it gaining prominence?.

In simple terms, RegTech is the fusion of the words Regulatory and Technology.

RegTech is the technology that applies innovative capabilities and techniques to help financial institutions improve regulatory governance, reporting, compliance, and risk management. It is making the shift from just a fancy buzzword to becoming a vital piece of the regulatory and compliance landscape.

History of RegTech

The history of RegTech can be categorized into three phases:

  • RegTech 1.0 (1990): This comprised quantitative risk management practices that we are familiar with today.

  • RegTech 2.0 (2000): Tools helping companies comply with regulations and improving supervision activities focusing on KYC.

  • and the industry is now on the verge of RegTech 3.0: Shifting from ‘know your customer’ to ‘know your data’ - interpreting compliance-related data and improving predictability through AI to drive efficiencies and reduce risk.

RegTech is not new. However, like any other application of technology, it is developing rapidly due to the decreasing costs of emerging tech, expansion of data, and a staggering increase in computing power.

Also, the 2008 financial crisis represented a turning point in the development of RegTech. The consequent regulatory changes and technological developments have fundamentally changed the nature of financial markets, services, and institutions.

Post-crisis fines have exceeded US$200 billion, and the ongoing cost of regulation and compliance has become a primary concern industry-wide - facilitating the emergence of RegTech.

RegTech is disrupting the financial sector and in order to illustrate how, we need to deep dive into the main challenges and pressure points faced by financial institutions that RegTech is meant to address:

Challenges faced by financial institutions:

  • Managing high costs of compliance

  • Introduction of additional financial regulations

  • Rising penalty fees on non-compliance with regulations

  • Legacy systems constraints due to insufficient automation & digitization to meet the pace of regulatory changes

  • Incompatible systems resulting in insufficient integrations

Current legacy solutions adopted by financial firms are ill-fitted to overcome such challenges and meet the stringent requirements continuously passed down by regulators.

And so, the demand for regulatory frameworks that give rise to more granularity and transparency has skyrocketed in the last few years.

The global RegTech market size is expected to grow from $7.6 billion in 2021 to $19.5 billion by 2026, at a Compound Annual Growth Rate (CAGR) of 20.8%.

Financial Institutions combating compliance and regulatory challenges with RegTech

The time is NOW for the financial sector to explore the capabilities of AI-powered risk and compliance management systems.

Capitalizing on big data and machine learning technologies, RegTech solutions analyze huge volumes of data from numerous sources at high speeds. This slashes the time needed to carry out highly complex analyses and checks, catalyzing improved productivity and efficiency gains.

For example, 10–15% of the workforce in financial institutions is dedicated to regulatory compliance matters. RegTech solutions can automate and streamline sophisticated tasks such as customer onboarding processes, enabling financial firms to potentially reduce the time and compliance costs associated with such tasks by 30-50%, according to Deloitte.

RegTech systems are paving the way for financial institutions to scale and adapt to the modern threat and regulatory landscapes through a) Identifying suspicious activity more easily and b) accelerating risk detection and remediation of complex cases.