What Is RegTech and Why It’s the Next Big Thing for Regulated Industries Like Finance

What is RegTech?

Forrester describes RegTech as “the technology-enabled transformation of the compliance function” via “specialized software for specific compliance use cases across various highly regulated industries.” Just as companies digitally transform and “future proof” operations, analytics, and the customer experience, RegTech enables them to apply the same philosophy to compliance.

RegTech is already paying dividends for leading companies, helping them improve risk mitigation and better protect their customers even while reducing the fixed cost of compliance over time.

Companies invested $1.37 billion in RegTech in the first half of 2018—more than in all of 2017—and investments are growing as the technology performs. Forrester predicted spending in this category would double in 2020, having grown 103% year-over-year in the first three quarters of 2019.

The interest towards RegTech solutions have only increased during 2020’ shifted business environment and, according to KPMG, RegTech investments reached record highs in 2020 with over $10 billion.  

The cost of non-compliance in Finance has become unmanageable

Financial and data security are of paramount importance to government software and consumers as well as companies—so much so that in 2020 regulators imposed more than $14 billion in fines on banks globally with the most common violation being AML breaches.

For firms still using paper-based or older digital systems for compliance, their very survival is at stake. Fifteen to twenty percent of banks’ operational costs already go towards governance, risk, and compliance, Bain & Company estimates; since these older banking software systems cannot scale, hiring more staff is the only option these companies have. Compliance staff spending has already doubled in the past six years, rendering this strategy unmanageable—especially as regulations continue to change.

Over 50,000 regulatory updates were published in 2015 alone, 100% more than in 2012. The volume and speed of regulatory change is only increasing, and companies are already spending between $1 million and $5 million on compliance for every $1 billion in revenue, PwC reports. Practically speaking, these costs alone—and not just a desire to innovate—will fuel RegTech adoption for years to come.

Facing down the most challenging aspects of compliance

Organizations’ compliance leaders are already under pressure from executives to reduce costs and risk; increasingly, they are called on to leverage compliance data strategically, adding business value in other areas as well. Rather than invest in more solutions, compliance professionals can use RegTech to reduce capital investments, streamline compliance, and add flexibility to meet changing demands. According to International Monetary Fund’s report, a company has decreased compliance cost from £18 million to £0.5 million annually by applying the RegTech solutions. There are several examples of successful RegTech use cases and capabilities:

• RegTech have increased the accuracy of regulatory reporting by 47% and also can simplify reporting for regulatory purposes, for example. It eliminates the gaps that exist between the intended purpose of regulations and firm’s interpretations of those regulations, which are prone to human error.
• Like other FinTech solutions, RegTech allows for better decision-making based on firms existing data, which adds business value outside of compliance reporting alone.
• Most importantly, RegTech positions firms for long-term innovation—a critical feature as regulations and business needs continue to change.

It’s in this space that the ‘thinking’ technologies of today's technology landscape—such as artificial intelligence (AI), machine learning, natural language processing (NLP), and blockchain ledgers—will enhance RegTech capabilities and make it a mission-critical investment for all financial firms. Adapting to changing business and regulatory requirements without these technologies and remaining competitive simply won’t be possible.

By 2020, RegTech had been projected to make up 34% of all regulatory spending. By 2025, the spending on RegTech will exceed $130 billion in comparison to $33 billion in 2020. That’s because RegTech is already living up to its promise: scaling to meet any regulatory requirement, mitigating risk, and even getting ahead of potential concerns. In time, RegTech will provide competitive value for companies that invest in it, allowing them to keep up with regulatory changes quickly while people-based systems lag behind.