Increasing regulatory challenges are giving rise to technological innovations that are shaping how banks face compliance issues. Within the realm of fintech, market is expanding for regulatory technologies or regtech.

Regtech or technology used to comply with financial regulations is rapidly being seen as an area of particular interest for banks.  The value of regtech has its origins almost 10 years ago shortly after the global financial crisis where banks had a number of regulations to comply with.

Since then banks have had to deal with the challenge of carefully maneuvering their businesses to avoid crippling fines from financial regulators. In 2016 the likes of Credit Agricole, HSBC and J.P. Morgan were fined collectively US$521 million for rigging the Euribor rate breaching European Union anti-trust rules. More infamously Deutsche Bank this September was fined US$14 billion for mis-selling mortgage securities in the US.   

Aside from avoiding fines, the cost of banking compliance is on the rise. According to the Federal Financial Analytics, a policy analysis firm, in 2013 the six largest banks in the US spent US$70.2 billion on compliance compared to US$34.7 billion spent in 2007.     

The challenge and cost of maintaining of being a compliant financial firm has prompted banks to look for alternatives to handle the risk management workload hence the birth of regtech. More often the tools such as big data analytics, cloud computing and machine learning are being used to support regulatory compliance.

“In the short term, adoption of regtech will provide operational efficiencies and cost benefits when applied to current compliance and risk management practices. Advanced regulatory data analytics allows big data to be examined in new ways, leading to more meaningful Management Information (MI) and insights into regulatory practices, rationale and further enhancements,” comments a recent EY report.

Some examples of regtech players include Trustev an online fraud prevention tool used for tracking potential fraud transactions in real-time and KYC3 a counterparty risk management platform that tracks your business relationships.

While fintech still holds the spotlight due to its ability enhance the customer experience, regtech nevertheless is something that banks need to pay attention to due to its ability to significantly reduce operational costs and allow banks to focus on growing their businesses.