#regtechvalue

Some policies that have been put in place to counter financial crimes have unfortunately had a chilling effect on banks’ willingness to do business in markets perceived to be risky – in part due to the high price of compliance,” says Vijaya Ramachandran, senior fellow at the Centre for Global Development and one of the study’s authors.

But, pointing to the new study, he says “regtech may be the solution to some de-risking woes”.

“What we’re seeing is that even as these policies are having an impact, financial institutions are coming up with solutions in the form of new cutting-edge technologies to help them comply better and faster with AML regulations,” Ramachandran says.

KYC utilities, for example, can reduce the amount of time correspondent banks spend on repetitive due diligence processes. Blockchain can improve the KYC data storage security.

Big data and machine learning can enhance correspondent banks’ ability to assess and manage risk through more sophisticated customer typologies and more accurate transaction monitoring. And biometrics can enable faster and more assured identification of individuals.

Over time, the study concludes, these technologies may alleviate some of the pressures on banks and “make holding correspondent banking accounts with clients in poor countries more likely”.

This enthusiasm about regtech is not new: GTR has previously reported on ways regtech can help the industry optimise compliance – a task that is still largely dominated by manual and mundane processes. A recent study found that banks could save £2.7bn a year by adopting machine learning and big data technology in their AML systems.

However, the argument that new regtech like machine learning and blockchain will bring banks back to de-risked markets is met with scepticism elsewhere in the industry.

“I don’t think technology is going to solve the problem. It’s a people’s, education and timing issue,” says Sean Norris, head of sales at Accuity.

He points to the fact that many of the de-risked countries, mentioning the likes of Afghanistan, Malaysia, Indonesia and Vietnam as examples, “haven’t got processes right for very basic things yet” and are still “far behind” when it comes to prioritising and implementing the Financial Action Task Force (FATF)’s guidelines and best practices for AML.

Norris doesn’t deny the power of technology – after all, Accuity itself is a provider of AML software and is also exploring the use of machine learning to minimise the number of false positives. He also argues that de-risking is in fact driving the acquisition of better technologies by banks in Africa and Asia to upgrade their AML processes.

“When you’ve got a bank in Jakarta that is still relying of self-declaration of a person in a KYC process, how is that going to be acceptable for a western bank? I don’t think technology is going to solve a behavioural problem and different attitudes to AML controls,” he says.

Regtech can lift the quality of advice, making it easier to comply with the best-interests duty, but it can also correct mistakes before they cause harm. This aspect of regtech is still in its infancy but, over the long-term, will radically reduce the number of regulatory breaches.

At the moment, only a small percentage of case files are thoroughly reviewed before advice is handed out. The situation will change as paper files are consigned to the dustpan of history and replaced with digital files that regtech – specifically artificial intelligence – can quickly scan and analyse.

RegTech (regulatory technology), is now regarded as one of the largest and most important sectors within the FinTech space. As banks and other financial institutions grapple with the costs and complexities of mission-critical regulatory requirements, the RegTech 100 was produced to identify the 100 innovative companies. FinTech Global, a data and research firm, performed an analysis of 416 RegTech companies, with the top 100 companies selected by a panel of industry experts.

The leading RegTech company that delivers automated compliance solutions, announced today at Money 20/20 the release of its Complaint Risk Signal Platform which uses data from the Consumer Financial Protection Bureau’s (CFPB) Consumer Complaint Database to provide companies with an up-to-date assessment of the risk associated with their consumer complaints.

The Complaint Risk Signal Platform provides companies with insights into their own complaint data, comparing it to their competitors so they can determine risk on a relative scale. It provides an overall assessment of a company’s risk based on the proprietary analysis of both CFPB complaints and enforcement data.

Offering cloud-based, real-time insights within the PerformLine platform, the Complaint Risk Signal Platform enables companies to see complaint trends over time, monthly trends, sub-product details, issue trends, untimely responses, response types and text analysis. It provides Chief Compliance Officers and any team within an organization a view into how complaints are trending across products and issues, providing critical insights into customer satisfaction and the effectiveness of marketing activities.

“When a company has a better understanding of their consumer complaints, they have a better understanding of their regulatory risk,” said Alex Baydin, CEO of PerformLine. “The intelligence and analysis of consumer complaints provided by our platform offers those using it a competitive advantage with visibility into how complaints are trending across multiple data points.”

Regtech in the fight against financial crime is only part of the solution. Already, it has helped the most important financial establishments to rapidly respond to audit and regulatory findings, however, junior RegTech startups won’t be able to meet the difficult demands of compliance for some of the world’s largest financial institutions. Regtech won’t be able to scale and even has the potential to create more technology silos. In fact, regtech solutions will fail unless they actively help simplify the technology landscape, while providing value, including multi-jurisdictional, multi-product onboarding and transparency to the client and front office for large corporates, streamlining time to transact and essentially improve customer experience. The goal in regtech solutions should go beyond regulation and focus on streamlining onboarding in the digital age. Moving from 100 plus days to 2 days or less for new products and services.”

Vivek Bajaj, vice president, Global Banking and Financial Markets at IBM, who has great expertise on IBM’s AI Watson, also has plenty to say about its potential in financial service. “Regulatory compliance, AML, KYC, conduct surveillance, customer engagement… The applications are many”.

“Many FIs face an unending flow of regulations, and it is a great area of investment. They need to redirect regulation, compare it with internal policies, and determine their obligations from this new regulation. And this is a very manually-intensive process. FIs hire up to tens of thousands of people just to do that piece of work.

“We acquired a company called Promentory Financial Group, which is pretty much 600 financial regulators – a strange acquisition for a tech company like IBM. But domain expertise is essential, and it helps us inject the regulation and internal policies into Watson’s logic and cognitive skills, cross-comparing it with previous and similar cases and actions.

“Financial crime and KYC is a great area, and it’s a very difficult thing to do. It’s very hard to create an accurate profile of SMEs. We will be able to use both unstructured and structured data sources to extract insights, and fill in the customer information file.

“Watson was able to complete 75 customer files in the time the team did 25 manually and couldn’t complete it.

“Many banks are in the range of +95% of false positives, which clearly tells us that something is wrong with the system.”

“We are also helping institutions in staff surveillance. Bad guys can also be found in our own companies, unfortunately, and Watson is able to read emails and spot a leak in an email in code that only talked about the weather, seemingly.”

In a statement issued with regtech firm Red Marker, the company said ASIC’s recent “crack-down” on non-compliance and regulatory breaches highlights the importance of adequate governance and compliance systems.

“Good governance starts with capability and the right set of tools – this is a terrific catalyst for change and encourages the industry to be serious about building a true culture of compliance,” said Red Marker chief executive Matt Symons.

“Regtech creates efficiencies and productivity improvements to manage regulatory obligations in a cost effective and compliant manner.”

Kaplan Professional chief executive Brian Knight said it was “extremely encouraging” to see many professionals already embracing regtech services.

“Their investment in regtech is enabling them to do all they can to maintain visibility and control across their licence – it is a no-brainer to be on the front foot by being able to identify and mitigate risk before the regulator does and starts to ask questions,” he said.

As more banks look to centralize the client onboarding and KYC functions, they’re also looking at a new overall strategy. By encouraging banks to look internally at how they interact with technology that can automate these processes, organizations can reduce the client onboarding process from months to just days, or in some cases minutes, globally. Although this may sound straightforward, these solutions are just one element of a broader strategy for financial institutions, particularly in today’s competitive landscape. RegTech that is smart and seamless as part of broader client lifecycle management technology, with inherent robotics and AI, allows banks to provide a transformative experience for their end institutional clients, providing competitive differentiation and a seamless customer experience.

We are seeing an upsurge in new RegTech providers as banks are looking to solve the issues of increasing regulation, streamlined customer experience, and digital transformation. RegTech needs to be industrial strength with proven technology. For large institutional banks, that means:

RegTech to meet complex KYC, Anti-Money Laundering and Anti-Terrorist Financing Regulations which needs to scale globally, across lines of business and channels.KYC Technology must be part of Client Lifecycle Management Technology that can transform and digitize front to back office smartly.There needs to be an inherent architecture and technology flexibility to adapt to every changing regulatory requirement. Hard-coded applications simply create more silos during a time of technology simplification.Robotics and AI should be integral in the technology, not just another buzz-word.Digitization, innovation, data integration from multiple data providers and internal legacy systems need to be smart, rule-driven and optimized to drive outcomes.

The end state for large global banks and the investment in RegTech solutions is to drive a larger digital transformation strategy, with end to end visibility and transparency for the customer across sales, sales assistants, operations, compliance, legal through to fulfilment. One view, one customer, regardless of channel, region or line of business. It’s really about customer centricity in a digital world.

As long as FIs exist so will regulation. Though currently there is lot of ambiguity around regulation for fintech segment, sooner than later fintechs companies will also be subject to the same compliance regulations as the incumbents. However, being compact size niche operators, fintechs don’t have the wherewithal to employ a team of compliance experts. With the advent of regtech, they don’t need to. Thus regtech serves the dual purpose of taking care of in-house compliance requirements as well as being a marketable product. Another factor which works for regtech is that they make the job of regulators easy. Regtech is not just for FIs but is also intended to help the regulators with their monitoring job.  With FCA already at the forefront other regulators may soon follow suit to encourage regtech to ensure compliance. It means regtech cannot be dismissed as just a buzzword or a fad that come and go. It’s here to stay and evolve. Despite its far-reaching capabilities, regtech is still a budding sector. It requires partnership of multiple players such as regulators, FIs, technical experts and evangelists, software specialists and entrepreneurial investors to achieve its full potential. It also requires a modicum of coordination among regtech firms, who need to form into an active workgroup with participation from all the aforementioned groups, to come up with standardized designs and solutions that can be used across the industry. Given the amount of work being done in the area, it may not be a surprise if regtech grows apart from the fintech parent and becomes an independent sector by itself.