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Regulatory Technology (RegTech)

Staying rooted while undergoing change

What is RegTech?

One of the components of fintech/financial innovation that is expanding the fastest is RegTech. The World Bank defines RegTech as a type of technology that is used for regulatory monitoring, reporting, and compliance in order to improve the financial sector. The concept also includes modernizing the industry or government side of regulatory activity, including the operations of regulatory agencies and the compliance initiatives of regulated enterprises. Regulatory technology firms use automation to address problems brought on by a technology-driven economy. Though theoretically applicable to any industry, the word "RegTech" originated in the financial sector, probably since this sector is one of the most heavily and intricately regulated in the world. Data breaches, cyberattacks, money laundering, and other fraudulent activities have grown owing to the development in digital goods. RegTech is a collective of enterprises that uses software-as-a-service (SaaS) and cloud computing to help businesses comply with laws effectively and affordably.

Features of RegTech
  • RegTech uses extract and transfer load technologies to efficiently separate and arrange jumbled and interwoven data sets.
  • It can also be used to quickly produce reports.
  • It can be utilized for integration needs to quickly launch solutions.
Benefits of RegTech
  • Delivering more effective and quicker decision-making skills while enhancing results
  • Enhancing regulatory efficiency
  • Coordinating internally within organizations.
  • RegTech tools attempt to track online transactions in real-time.
  • These solutions can easily configure, generate reports, and continuously monitor and assess large amounts of data. They can automate a number of processes, which saves a lot of time and money.
  • The technology uses analytical methods to harvest existing massive data sets in an intelligent manner and realize their full potential.
Evolution of RegTech
  • RegTech 1.0: In the 1990s and 2000s, financial institutions started implementing new technologies to track and analyze the risks associated with particular rules or processes. This was known as RegTech 1.0. These evolved into some of the techniques for quantitative risk management that are used today.
  • RegTech 2.0: These solutions have aided businesses in following regulations and enhancing their oversight functions. The majority of RegTech applications have emphasized "know your customer" (KYC) through enhancing consumer protection and addressing unethical behavior. RegTech 2.0 is anticipated to work more closely with banks, regulators, and subject matter experts.
  • RegTech 3.0: RegTech 3.0, or the transition from "know your customer" to "know your data," is about to hit the market as financial institutions begin to see risk and regulation as data and prediction issues that can be solved by technology.
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What are the Future Opportunities for

Businesses in the Field of RegTech?

According to our analysts at Research Nester, the global RegTech market would grow at a CAGR of about 22% between 2023 and 2035 and reach a market size of USD 24 billion by 2035. The online gaming industry's growing preference for automated regulatory compliance and identity verification solutions, as well as the pharmaceutical and banking, financial services and insurance (BFSI) industry's rising need for risk and regulatory compliance solutions, are anticipated to drive the demand for RegTech solutions. On the other hand, our analysts predict that over the next few years, the market is expected to undergo a significant transformation as a number of top businesses are spending on these compliance solutions and are also expanding quickly; thanks to the new launches and improvements, collaborations, and cooperation. Our estimations states that spending on these compliance solutions by businesses is anticipated to rise by 35% annually. In addition to this, the rising demand for regulatory reporting-as-a-service amongst financial institutions is also poised to create numerous growth opportunities for businesses planning to invest in this field.


RegTech in Financial Institutions

According to our analysts at Research Nester, the financial industry is expected to spend about USD 120 billion on regulatory compliance over the next five years.

RegTech promises to lower compliance expenses and speed up the procedure. Additionally, it lessens customer-side challenges and the likelihood of compliance failures. Applications of the technology in financial institutions might lead to decreased penalties and litigation costs. Financial institutions also are benefitted with a reduction in the risk of reputational damage associated with data or cybersecurity breaches, brought on majorly by poor compliance monitoring. Data analytics can also be enhanced with the use of the technology. Besides this, institutions may also create a more thorough picture of their clients' internal and external financial histories through data analytics. Here is a brief of how RegTech technology functions in combination with other related technologies in the banking, financial services and insurance (BFSI) industry.

  • RegTech and Blockchain- Business practices in the banking industry may be revolutionized by blockchain technology and RegTech integration. RegTech software has made it simpler for cryptocurrency businesses to keep up with regulatory changes. RegTech relies on having access to the required Know Your Customer (KYC) and Anti-Money Laundering (AML) data and regulations. The problems that financial institutions are currently encountering with KYC and AML regulations can be solved by blockchain. The immutability of blockchain transactions, which cannot be changed or altered, makes AML and KYC compliance transparent. RegTech ensures total transparency in each cryptocurrency address's transactional history, making every exchange of digital money safer for financial clients. Blockchain enables RegTech to maintain track of a cryptocurrency's origin, history, and connections to illegal activity, ransomware, underground marketplaces, and sanctioned individuals.
  • RegTech and Fraud Prevention- RegTech has sped up its fraud protection measures by automating several of its client journey processes. RegTech is most often associated with AML compliance, although it also helps to guard against and prevent fraud, albeit mainly in an indirect way. Regulatory compliance can be utilized as a weapon and a defense against financial crimes by employing technology like AI, ML, robots, blockchain, and biometrics. Such a benefit not only decreases the burden of expense and complexity, and moreover boosts the capabilities of regulators. Large firms' security experts receive thousands of threat warnings and notifications each day. Each susceptibility may be assigned to a threat score and prioritized, monitored, and treated prior to an assault thanks to RegTech's cutting-edge risk scoring technology and powerful analytics.
  • RegTech and Digitization- The way risk management and regulatory compliance needs are addressed and delivered is evolving as a result of new digitalization technology. The adoption of the cloud for both core and non-core operations, financial platforms, application programming interfaces (APIs), and the integration of backend solutions across services like money transfer or payments are some of the most frequently targeted areas for digitization. With the digitization of compliance, businesses may be able to streamline their regulatory procedures and save burdens. RegTech has been successful in being one of the regulatory reporting solutions which digitizes audits and checks, allowing networks to meet regulatory criteria more quickly. Paper-based processes have been successfully replaced by RegTech. Although it has simplified data gathering, access, and screening, it is still unable to provide decision assistance that is integrated with the business. RegTech solutions can be used to speed up the onboarding of corporate clients by automating a significant portion of the data collection and collation required for AML compliance. It's not about getting rid of the human component of your compliance process when you digitize onboarding. Digital technologies automate manual chores like collecting data and documents so that your team has more time to concentrate on research.
  • RegTech and Employee Surveillance- RegTech tools aim to advance beyond conventional rules-based surveillance systems by adopting a predictive, risk-based surveillance model that finds patterns in data and uses those patterns to guide decision-making. Some RegTech solutions that use a more foresighted risk-based surveillance methodology put the emphasis on connecting data streams that were previously mostly examined in isolation. RegTech solutions are being created to aid in the integration of these many data sources and formats as well as the identification and tracking of abnormalities deserving of attention. A firm's regulatory compliance programme may operate more accurately and effectively overall if certain RegTech solutions enable a higher amount and variety of information to be easily evaluated.

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Swara Keni

Head- Global Business Development

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