Living in the present means we're perpetually at the peak of technology, sitting on a pyramid of past achievements. In the 1950s credit cards became plastic miracles of payment, an apex of FinTech resting upon the [modern] invention of credit some half-century prior, along with zip-zap machines which made a quick copy of the card to be sent off to banks for verification. The timing was right, with society becoming more convenience-driven and consumer-focused—credit card lore claims it was a man who forgot his wallet at a restaurant that came up with the idea.
Today is no different. Upon a slew of fantastic inventions like the internet comes one of the latest, hottest, and nerdiest realms of FinTech: regulatory technology. RegTech is no less a product of its epoch than the original credit card was: the 2008 crisis panicked regulators who started legislating enthusiastically, in turn giving rise to compliance challenges for companies in every sector. Alongside these developments came the further maturity of technologies like cloud computing, artificial intelligence, machine learning, big data analytics, and blockchain. Finally, all it took were disgruntled tech-savvy bankers and kids looking to whet their entrepreneurial appetites to start founding companies, and voilà: the age of RegTech.
What on earth?
Regulatory technology has been a couple of years in the making, but the term "RegTech" came to life only in late 2015, legitimising the phenomenon and its place in the psyche of today's finance professionals. As of yet, it's in the era of multiple definitions. Different sources variously determine seven or ten sub-categories, but most agree broadly that it's technology, heavily relying on biometrics and artificial intelligence, that helps companies comply with such areas of regulation as Know-Your-Customer, Anti-Money-Laundering, fraud protection and data breaches, password security, risk management, stress tests, and due diligence. The products are tailored for different sub-sectors like e-payment, fund management, banking, and others. Unsurprisingly, RegTechs tend to have a B2B business model.
Dropping the balm
The demand for RegTech doth arch no eyebrow. According to Thomson Reuters, around a third of compliance teams spend about one whole day of their week just tracking changes in the field of regulation, with a worldwide average of 200 international publications/changes/announcements occurring every day. The latter statistic, for reference, is up from 110 in 2014, and 50 in 2012.
Over two thirds of regulated companies expect the cost of senior compliance staff to increase in 2016 as demand for expertise in this area is ever higher. Compliance team budgets are thus rising overall, as are compliance budgets themselves.
According to the Financial Times, big banks like Deutsche Bank and JPMorgan already spend well over $1 billion on regulatory compliance annually. McKinsey carried out a study of large US and European banks, discovering that there were forty-five times more regulatory fines and settlements in 2014 than in 2009. A BBVA study found that 10-15% of a company's personnel are fully saddled with governance, risk management, and compliance.
Perhaps it's even surprising that "RegTech" only appears in the lexicon as late as 2015.
On the charts
This year'sFinTech 100, a list of the top FinTech innovators, features no fewer than nine RegTechs.
One of them is SecureKey, a Toronto-based company offering a user-authentication solution to online providers and applications. They remove the need to store passwords which, for many of their clients, would otherwise necessitate compliance with a host of customer security regulations.
Another is AQMetrics, which helps asset managers and fund administrators monitor regulations such as AIFMD, AML, UCITS, MiFID, and others. They promise a cloud-based and ultra-fast platform that helps finance professionals stay informed of their risk, so as to make it simpler to be compliant.
This year's Luxembourg FinTech Award winner, Governance.io, is also a RegTech. It provides a platform for fund managers to perform oversight and controls on their funds, gathering and visualising information on how the fund structure is built, who the service providers are, what the fund's assets are, what transactions have taken place, which NAVs have been published, the documents received, etc.
Regulatory laboratory
RegTech optimists foresee a world where artificial intelligence and machine learning can capably comb through unstructured data, extract necessary and verifiable information, and even automatically transmit it to regulators. In effect, the shift will happen when algorithmic data extraction becomes accurate enough to be trusted, and once this is the case then regulated and regulator will be closer than ever.
Rahul Matthan points out in this interesting article that this will have an effect on the way legislation occurs, since regulators cannot electronically harvest companies' data without first defining why they need to. Indeed, they will have to programme the APIs. Amongst the remaining puzzle pieces would be, besides the strength and accuracy of AI, security issues given the exchange of sensitive client information and cloud storage.
As it currently stands, RegTech is a rich field with young, hyper-specialised companies providing efficient solutions to a number of problems.
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