The cost of the governance, risk management and regulatory compliance for financial service companies is estimated to be about 15 percent of the total cost of running a firm. This takes a huge bite out of any company’s profitability. Innovative, regulatory technology (regtech) can help.
“Regtech is about the intelligent use of technology to get better outcomes for clients,” said John Byrne, CEO of regulatory risk intelligence firm Corlytics. “It’s also about stopping regulations from getting in the way of the user experience.”
Byrne participated in a panel discussion on regtech, as part of The Future of Fintech, an event organized by Enterprise Ireland in Dogpatch Labs in January of this year.
Keeping financial services regulators happy
“Regtech is where financial services companies meet the laws that govern them and the regulators that oversee them,” said Lisa Ezrol Curran, Founder of FinTex Chicago. “Part of keeping regulators happy is ensuring that they understand what you are doing. When regulating innovative fintechs, a key part is to provide resources for the regulators themselves, so that they have trusted advisors they can turn to.”
For Guenther Dobrauz, who leads PWC Legal in Switzerland, regtech is a natural evolution of fintech.
“When fintech first emerged, it was perceived negatively, as a competitor by the banks. But at the same time, they were being hit by a regulatory tsunami in the wake of the financial crisis,” he said, referring to measures ranging from Dodd Frank to MiFiD and GDPR.
Banks realize they simply couldn’t handle all this internally, and they began to see there was no financial value to be derived from trying,” said Dobrauz. “They realized they were not losing out by allowing regtech companies in to help.”
Dobrauz warns that the regulatory tsunami is still coming. He says that the impact of GDPR will be twice as big as MiFiD.
“The result is that regtech firms are being actively invited in by banks,” added Dobrauz. “As opposed to fintech, which they are trying to keep away.”
Global regtech drivers
Global trade is driving demand for regtech too.
“For legacy banks, the tightening of regulation is not limited to geographic boundaries,” said Cas Coovadia, managing director of the Banking Association of South Africa. “We didn’t have a financial crisis in South Africa but we are still subject to global regulations that are expensive for a relatively small banking system.”
Coovadia believes regtech addresses the need bankers have to find a balance between the trust and stability of traditional banks, and the services of fintech. Banks in South Africa are amenable to regtech but challenges remain not just in relation to legacy systems but also the legacy mindsets among regulators who often still insist on paper trails.
“The good news is that regulators are not in the business of fining people so much as of finding better outcomes,” said John Byrne of Corlytics, who contrasts the on-boarding customer experience offered by digital firms with that of banks. “If you look at eBay and other digital firms, they have a huge sense of what is reasonable. If banks were in the digital space they’d have a different view of what is reasonable, in terms of how you trust customers, which would result in an onboarding process that takes 6 hours, not 42 days.”
According to Peter Oakes, founder of Fintech Ireland, change is coming, and banks are already using biometrics and artificial intelligence to meet ongoing customer due-diligence needs. And a good regtech supplier is increasingly seen as a source of competitive advantage.
“It is easier for financial services institutions to enter into things like digital currencies when we have a good regtech provider who will keep us compliant and help with the adoption of new technology,” added Ezrol Curran.
And the bottom line is that, once a financial services entity embraces a new technology, the regulator must too. Indeed, with innovations such as M-Pesa, the hugely successful mobile money solution in Kenya, the regulator there allowed the innovation to move ahead of it.
“By contrast, M-Pesa was tried in South Africa and it failed,” said Cas Coovadia. “This demonstrated the difference in approach. In Kenya, they watched it and because they saw the impact it could have for financial inclusion, it was let be. In South Africa, it was killed by heavy regulation. Sometimes what is required is bravery – not too common among regulators – and a will to move with the times.”
“To be fair to regulators, their role is to enforce the law, not create it,” said Guenther Dobrauz. “It’s not about creating a total sandbox where everybody can do anything. It’s about having minimum rules.”
Advice for growing regtechs
“For regtechs looking to grow, engaging with regulators is a must, but it can also offer advantages,” said John Byrne of Corlytics. “Most of the US federal regulators are in the market for regtech and it takes a third of the time to close a deal with them than it does with a bank.”
Geraldine Gibson, founder of risk insight and compliance automation company AQmetrics, feels similarly.
“When I started AQMetrics, the regulators didn’t have time to talk to us, they were so awash with all the learning up they had to do,” said Gibson. “But once they got on top of that learning, they started coming to us. They now see the value of regtech and are much more open to speaking to regtech solutions providers.”