Nothing regular about RegTech

If necessity is the mother of invention, then there’s a new child in financial services that reconciles compliance and regulation with a seeming opposite: efficiency.

RegTech—or regulatory technology—arguably represents the fastest growing segment in the scorching-hot FinTech arena. RegTech aims to take the ever-changing, complicated and constant demands of banking compliance and automate them. That means a less expensive, time-consuming process with the potential to improve customer experience.

Currently, the RegTech landscape is making huge strides in three broad categories: big data, data analytics and artificial intelligence, according to Joe Cartee, chief compliance officer for BBVA Compass of Birmingham, Ala. 

“These advances present opportunities for banks to better evaluate and control regulatory compliance risks, and the industry is beginning to test and run trials in these areas,” Cartee says. “It’s often said the industry is ‘drowning in data, yet starving for knowledge,’ and this is particularly true in the compliance/risk management space.”

RegTech, he believes, will present rich opportunities for banks to manage regulatory compliance risk “with a great deal of increased precision and efficiency, including a substantially improved time-to-awareness.” 

Cartee points to the application of robotics to compliance monitoring functions, which rely on data aggregation and analysis, along with report automation. In May 2016, the Spanish parent bank of U.S. BBVA Compass hosted a RegTech Innovation Lab, in conjunction with the Institute of International Finance (IIF), at its BBVA Innovation Center in Madrid, with startups, regulators, and other world bankers in attendance.

Since then, the dual need for systems and services to make compliance easier and accurate has only grown more acute.

Mounting regulation and concerns in the wake of the financial crisis have led to an avalanche of fines to U.S. banks: exceeding $200 billion from the crisis through 2015. Meanwhile, 89 percent of bank CEOs consider regulatory commitments a threat to growth.

Yet where fines mount, so grows the field of FinTechs that seek to solve the regulation riddle. By Bain & Co.’s conservative estimate, more than 80 RegTech firms already exist—with more popping up, seemingly, on a monthly basis. With governance, risk and compliance (GRC) accounting for an estimated 15 to 20 percent of the total cost to run the bank, GRC is driving 40 percent of costs for ‘change the bank’ projects.

Bart van Liebergen, associate policy advisor for the Institute of International Finance (IIF), points out that U.S. retail banks have long obtained most of their technology from a “pretty small group of established IT vendors; large banks among them also develop their IT solutions in-house.”

But as he puts it, “That landscape is changing quite a bit.”

While it’s no surprise that banks are embracing cloud computing, machine learning and the like, the IIF’s March 2016 report on RegTech reveals that the goals are as practical as the tech is sexy: the endgame “to reduce costs and friction, enhance security and enable new products and services.”

RegTech has “been around as long as FinTech, but at a much lower decibel,” says Kevin Petrasic, partner in Washington D.C.’s White & Case LLP law firm, which handles financial regulatory issues. Yet it’s clear the niche has risen above any noise floor created by customer-facing breakthroughs such as check deposit via smartphone or login via voice authentication.

“Technology options that make it easier for banks to manage, process and share regular call reports have been around for years,” Petrasic says. But with an alphabet soup of state, federal and international regulations—bearing jargon-larded acronyms such as KYC, CAMEL, BASEL III, AML and CFPB—Petrasic believes the need for RegTech solutions will snowball. And he should know: He’s a former banking regulator himself.

“Marketplace vendors recognize that there are great opportunities here,” Petrasic notes. Large banks need help to sift through massive data piles—while smaller institutions that lack the manpower and deep pockets hunger for better automation and analytics to get the job done.

And as any banker worth his or her salt knows, a solution that bolsters the bottom line while freeing up staff time deserves a closer look.

Regulatory compliance and reporting have become “a much bigger component of banks’ day-to-day business, with associated costs increasing accordingly,” van Liebergen points out. And as regulations multiply, so does the complexity: “Running a bank is increasingly becoming a question of optimization under a thousand constraints.”

Thus adding automation makes the reporting process more efficient and reduces human error; van Liebergen adds that the emerging use of artificial intelligence and machine learning in RegTech can help manage complexity. These technologies can also improve existing surveillance systems that identify fraudulent transactions on payment systems. Several IIF members now use or pilot these types of RegTech systems.

By many forecasts, RegTech may also smooth the way in customer onboarding. Here, 88 percent of banks believe that know-your-customer requirements gum up the works, while 21 percent think current KYC technologies can handle changing regulations.

Cartee of BBVA Compass believes RegTech can also address areas that include complaint management, fair lending and broader compliance monitoring. That said, any rush to embrace all things RegTech needs a look before leaping.

“While the opportunities are exciting, caution and care are in order,” Cartee says. “In particular, there are risks of incorrect outputs, false positives or false negatives, and incomplete views when an automated process is designed and implemented… Ultimately, a sound business case is important, and the considerations should include impacts on efficiency, effectiveness, risk and resources.”

So while necessity is the mother of the banking world’s beautiful new baby named RegTech, a baby remains a baby nonetheless. And wise bankers, much like wise mothers, know the virtue of patience as kids grow up.

Karen Epper Hoffman is a contributor to BAI Banking Strategies and has written about banking and technology issues for nearly a quarter century.