Technology investment levels are increasing rapidly across the financial services sector, driven by a desire to contain costs, improve compliance, and enhance customer service and productivity. As the ‘steady and predictable’ conditions of pre-crisis times have eroded, new challenges have emerged – compelling established financial services organizations to evolve and increase agility to enhance business performance and remain relevant.
The structure of the industry has been transformed by start-ups who have introduced innovative digital products and services that directly challenge the traditional status quo. The disruptive nature of such solutions has had a profound impact across business models, products, services, delivery models, core operations, existing infrastructure and consumer engagement.
A Complex Environment
The financial crisis of 2008 was a tipping point for the financial services sector. Inadequate regulatory reporting and compliance monitoring procedures were among the factors that led to fraudulent practices, initiating the downturn as a result.
Of all industry participants, banks and regulators hold the most critical responsibilities. Regulators have responded by creating stricter rules and making compliance mandatory. They penalize companies when required, but these retrospective decisions are not preventive. Financial institutions are trying to remedy the situation by increasing the number of compliance staff.
However, it is apparent that their efforts are not completely effective to meet the challenges posed by a constantly-evolving regulatory framework. The inconsistency and fragmentation of data management – coupled with legacy systems reliant on manual processing – adversely impact data aggregation and the accuracy – and quality – of output.
Over the past decade, technology has graduated from being merely an enabler of the existing set of procedures and processes, to being a disruptor that can deliver a foundation for innovation and transformation. Tech-enabled RegTech solutions focus on delivering better compliance so that companies can deal with existing and new regulations more effectively and efficiently.
Adopting a digital-first approach, such solutions are designed to automate standard processes, send alerts in case of anomalies, update as per the latest requirements, analyze all the available data, and create reports that can be submitted to the authorities. Automated RegTech solutions are able to achieve much more than is feasible through human resources alone – in shorter timeframes, and with high levels of accuracy. In most instances, they significantly augment the capabilities of compliance teams.
RegTech and the Digital Transformation
Digital transformation initiatives drive company-wide change and support greater efficiency. As solutions disrupt different parts of the RegTech ecosystem, the digitization strategies of financial institutions have started to take shape. From a traditional focus of using basic software to automate manual repetitive processes, companies are now more willing to experiment to deliver outcomes that meet customer expectations related to agility and customization. Some of the most common focus areas for digitization include the adoption of Cloud for core and non-core functions, banking platforms, application programming interface (APIs) and integration of backend solutions across services such as money transfer or payments.
Most RegTech solutions can be integrated with existing IT infrastructure, enabling relatively straightforward adoption. The innovative solutions are designed to meet specific challenges. For instance, consumer verification apps that use artificial intelligence (AI) and machine learning (ML) significantly reduce the time needed for verification and can be done virtually. The impact of RegTech goes beyond compliance and contributes to improved operations and enhanced competitiveness. Since data is the key input for the new wave of solutions, the use of platforms, dashboards, analytics, ML and AI enable insight to be delivered to different functional teams within an organization. The insights can also be customized to benefit other business applications such as customer engagement, marketing, new products, and services, thus enhancing overall efficiency and productivity.
The value proposition of RegTech has found acceptance across the financial services industry. While companies may adopt it for different reasons and maturity levels of solutions implemented may differ, effectiveness has been proven beyond doubt. The impact of emerging technologies remains in the nascent stage. However, efforts to experiment via accelerators and strategic partnerships are likely to become increasingly commonplace. The focus is on outcomes that will help companies to retain relevance and competitiveness in a rapidly evolving market with a ‘better, cheaper and faster’ approach.