Is RegTech a New Disruption in Financial Services Space?

By Debasis Mohanty . December 20, 2023 . Blogs

The financial services sector has always attracted strict compliance regulations, and understandably so. For example, in 2017, the Guardian reported how the world’s biggest financial institutions, including Bank of America, JP Morgan, and Morgan Stanley, among others, were required to pay around £264 billion due to poor conduct.

Today, with constantly evolving regulatory norms and the increasing online threat landscape, it’s essential that financial institutions are able to meet compliance regulations, ensure data security, and identify potential fraud. This is where RegTech comes to their rescue.

RegTech, as the name suggests, refers to the application of technology to assist financial institutions in managing regulatory procedures or complying with critical regulatory requirements or norms. Technology firms or vendors offering RegTech solutions help financial institutions streamline compliance processes, keep up with the regulatory landscape, improve risk management, and inexpensively comply with the concerned legislation.

So, is it viable to label RegTech as a new disruption in the financial services space? Let’s explore.


Why Do Financial Institutions Need RegTech?

The activities of the financial services sector are constantly scrutinized for compliance with the regulatory norms. Often, compliance costs across financial institutions constitute a significant portion of the total expenses. It’s worth mentioning that a negative correlation exists between the size of the instruction and the percentage of expenses dedicated to the compliance procedures. All in all, institutions have to deal with substantial compliance costs, and that becomes a grave challenge.

As it stands, technology plays a significant role in providing adequate support to financial institutions. RegTech, within the system of FinTech, streamlines the procedure of compliance as well as cuts down the varied costs. Technologies like AI, Cloud, API, Virtualization, ML, Blockchain, Data Mining, Data Analytics, Big Data, etc., drive RegTech solutions and equip financial institutions with the necessary control over the compliance landscape.


The Many Benefits of RegTech for Financial Institutions

Efficiency and Accuracy

RegTech, when properly applied, can help firms take a more uniform, coherent, and consistent approach to data quality – from the onboarding phase through continuous client monitoring and management. 

RegTech uses machine learning (ML) and artificial intelligence (AI) technology to accurately analyze huge volumes of data. It assists businesses in locating abnormalities, spotting potential compliance infractions, and spotting patterns that can point to fraud or legal transgressions. 

Moreover, RegTech solutions allow for real-time monitoring and reporting, enabling organizations to act promptly in response to legislative changes and mandates. This aids companies in avoiding sanctions, fines, and reputational harm brought about by non-compliance.

Cost Reduction

Organizations can streamline their processes and boost efficiency by substituting technology-driven procedures for manual labor and paperwork. RegTech significantly facilitates this by automating and digitizing tasks. RegTech solutions ensure consistency and precision in tasks connected to compliance, lowering the risk of non-compliance and corresponding fines.

In addition to integrating various systems and streamlining workflows, RegTech solutions guarantee a smooth compliance procedure by removing duplication. This serves to streamline the overall compliance workflow and lowers maintenance expenses associated with maintaining several systems.

RegTech products also provide thorough reporting capabilities and strong audit trails. Audits are more effective and take less time when compliance activities are tracked and recorded automatically.

Enhanced Data Analytics 

RegTech streamlines and expedites compliance reporting by pulling pertinent data from various data sources, analyzing the data, and producing reports. These solutions guarantee consistency and accuracy in reporting while adhering to legal regulations.

RegTech solutions’ predictive analytics capabilities can evaluate the underlying reason for a regulatory violation and use this information to forecast any future risk factors or compliance problems. As a result, institutions are better equipped to predict regulatory changes, simulate different scenarios, and evaluate the possible impact on compliance requirements by analyzing historical data and using statistical models.

Efficient Risk Management 

RegTech systems are essential for supporting risk management because they make it possible to aggregate robust risk data for capital planning and liquidity reporting. To give a complete picture of hazards, these systems combine data from many sources, including internal systems and external market data. 

RegTech systems assist organizations in identifying vulnerabilities, assessing the success of risk mitigation strategies, and making well-informed decisions to optimize capital allocation and ensure regulatory compliance. They do this by simulating various scenarios and assessing their possible impact on capital and liquidity. In the end, these capabilities promote financial stability and improve risk management procedures.


But There Are Challenges That Financial Institutions Must Be Aware Of

Frequent Additions in the Regulations

The regulatory environment is continually changing. There are constantly new norms added to the current ones or changes made to the existing norms. The most recent regulatory standards must be met by financial institutions’ RegTech solutions, which must be kept up to speed with these developments.

Integration with Legacy Systems 

The systems, technology, and processes used by financial institutions are frequently sophisticated and have been created over time. RegTech solutions, in such an ecosystem, find it challenging to meet the needs of the enterprise. The idea should be to employ RegTech solutions as a way to tackle the complexity of legacy environments and operating models. One viable approach is to update the legacy technology processes to accommodate a seamless integration with RegTech solutions.

Lack of Flexibility

RegTech solutions may not always provide the necessary level of customization freedom because they are created to fulfill specific compliance needs. Off-the-shelf RegTech systems may not be able to easily support the special workflows, data structures, or compliance procedures that financial institutions may have.


The Road Ahead for Financial Institutions

Is RegTech disruptive? It surely is when we consider how RegTech solutions excel at equipping financial institutions with real-time analytics capabilities and the tools to navigate the utterly complex regulatory environment.

At Verinite, we help financial institutions leverage the most innovative technologies, establish a robust compliance infrastructure, and bolster the bottom line. Let us help you with a concrete roadmap for employing RegTech solutions and realizing value from them. Reach out to us here.

Debasis Mohanty

Debasis heads the delivery for all client engagements at Verinite. He has a long track record of delivering high quality, responsive, secure and cost-effective business and technology solutions in BFSI domain. Outside his work, he is an amateur animator, a sports enthusiast, a voracious reader and a Trivia buff.

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