Last year, we wrote about the various ways financial institutions were using technology to streamline and improve regulatory compliance. We thought it was time to revisit the topic, given regtech’s quiet but steady advancement in the financial services industry in the time that has passed.
A specific definition of “regtech” is still evolving, but generally speaking, the term applies to any automation or digitalization of manual regulatory compliance processes to add speed, security, accuracy and agility in complying with regulatory requirements. Part of a broader trend toward digital transformation in financial services, the term typically refers to the regulatory application of existing technology, not the technology itself — a point well-made by my colleagues John Harvie and Derek Cummings in Regtech: A Confluence of Opportunities, a paper Protiviti published earlier this year.
Much of the driving force behind this transformation is coming from financial institutions, who are replacing outdated and disjointed legacy systems with new core technology and are looking for ways to replace expensive and error-prone manual processes with automated processes across all functions, including compliance.
It is fair to say that, historically, technology funding for compliance functions has been low. As the regulatory expectations increased over the years, many compliance processes were enhanced in an ad hoc manner, utilizing antiquated systems and manual consolidation of multiple data streams from disparate sources that were hard to manage and/or update. A common solution to the complexity (which still exists today) is to add more resources to existing teams.
Digital transformation initiatives have created opportunities to consolidate and integrate these systems, generating efficiencies that organizations are using to reduce the time and resources devoted to routine compliance tasks. These opportunities and technology applications are in various stages of maturity. Financial institutions are now in a position to prioritize the more mature and proven technologies to provide real-world solutions to high-cost business problems in areas that cause the biggest expense.
One such technology that is higher on the maturity curve is robotic process automation (RPA) — the use of software to work alongside human operators to perform high-volume repetitive tasks. It is most commonly encountered in the automated menus most large companies use to route incoming calls, or schedule an automatic call-back at times of high call volume. Increasingly, financial institutions are using RPA to perform compliance tasks, specifically in AML transaction monitoring, OFAC screening, and ”know your customer” (KYC) activities.
Visual analytics is another technology seeing widespread regtech application. Dashboards and other graphic representations of real-time data with drilldown capabilities and cross-tabulation provide at-a-glance insights that were functionally impossible to achieve previously with manual-based reporting. (The Protiviti Risk Index is one such example of a dashboard used to provide dynamic risk information at glance.)
Other innovations, such as artificial intelligence and biometrics, are making regtech inroads as well, particularly in onboarding and KYC compliance, though they are behind in the maturity curve compared to RPA and visual analytics. Technology acceptance is changing fast, however, with regulators encouraging “responsible innovation” and testing of new applications in a controlled environment. The number of vendors offering regtech solutions is also increasing. One research cites $3.2 billion in funding raised in the past five years for startups specifically focused on regtech solutions, primarily for the financial services industry.
Regtech is an exciting trend, with a promising future. As our clients look for ways to drive down costs and increase compliance efficiency, we continue to advise them to assess their options carefully, invest time, effort and resources in those activities most likely to deliver value, and be prepared to learn quickly from the failures as well as the successes of others.