Exploring the Role of RegTech in the FinTech Industry

Here comes RegTech — a new technology field that ensures that companies, especially tech firms, act in accordance with implemented government rules and regulations.

The first time we came across the term RegTech was when our team was delivering Python development services to Clear Minds — an investment platform that acts as a digital adviser for people who want to make profitable investments in the long run. During the final stages of development, in May 2018, the GDPR came out.

If you’re lucky enough to have never dealt with GDPR, I will briefly summarize what it is. It’s a regulation created by the EU that forces companies that work with customers’ personal data — in our case, tech companies — to protect the information they capture. Namely, they cannot disclose it to third parties, and must even delete it if a customer asks them to. GDPR is the reason why your email boxes were recently bombarded with new Terms & Conditions and Privacy Policies of all the services you were using or subscribed to.

Like many other companies, we faced a problem with storing personal data. Not only did we have to study the law itself; we also had to understand how it would affect Clear Minds and what we had to do to comply with the regulation. And we weren’t alone.

In this guide, as a fintech development company we’ll describe RegTech in FinTech, explore the latest trends in fintech and innovations in RegTech development, and provide key considerations for building a successful RegTech product. Whether you’re a fintech startup looking to disrupt the industry or an established financial institution seeking to improve your compliance processes, this guide is for you.

What’s Wrong with Regulatory Compliance?

The problem is that (1) GDPR is only one of the hundreds of other regulations that companies have to comply with. And (2) new regulations appear faster than companies can analyze them and take the corresponding action. Hiring additional legal staff and forming a compliance department isn’t something that all tech companies can afford, never mind startups.

Of course, many firms decided to ignore the regulation — but hey, GDPR fines can be up to €20m and 4% of a company’s annual revenue. I doubt that anybody who’s sane would take such a huge risk. Although non-compliance with any regulation may result in enormous fines, some companies still think, “Well, I don’t care.” That’s a big no-no. Usually, breaking government regulations or even one-time malpractice will result in huge fines, then scandals, and eventually a trial. CB insights made a terrific compilation of 2017 headlines that illustrates the problem:

RegTech — an Effective Compliance Solution

Regulatory Technology (a.k.a. RegTech) is any technology that aims to standardize regulatory processes, create unambiguous interpretations of the regulations, and, most important — automate the compliance process. To characterize the RegTech industry, Deloitte analyzed around 333 RegTech companies and identified 5 main categories of Regulatory Technology.

Let’s dive deeper into these categories and consider how artificial intelligence can contribute to automating each of them. This will help us understand why excluding the human factor by using AI-based tools offered by RegTech developers is more effective than traditional manual operations.

Compliance

The regulations landscape is extremely dynamic, which makes it nearly impossible for a human to keep up with the latest updates. Here’s exactly where AI and machine learning enter the picture, as they can perform such regulatory compliance activities as:

• Searching for new or reviewed regulations
• Analyzing the collected information
• Reporting
• Sharing the impact of changes with the stakeholders, etc.

AI algorithms can be trained to automatically perform these tasks, with appropriate reviews at key decision points made by the compliance officers.
64% of companies that have already adopted AI tools name compliance requirements one of their main reasons for doing so. These include:

Identity management and control

The Know Your Customer (KYC) process covers client identity authentication and screening. It’s common to perform it the old-school way, manually working with documentation, but RegTech developers rely on advanced data aggregation and analysis tools. Again, AI and machine learning can expand the scope of the KYC process by gathering information from multiple sources that usually requires hours of searching and ultimately may never be found.

Risk management

Some RegTech solutions can continuously monitor risks. That is, they learn to identify insecure situations based on predefined data. In the financial sector, RegTech solutions use advanced analytics and big data to predict market changes and mitigate similar risks. After all, machines are far better with numbers than people.
The adopters of AI tools for FCRM consider them to be most effective for performing the following activities:

Regulatory reporting

Few people enjoy drawing up reports, and even fewer actually create them. But this is work you have to do, whether you’re a clerk or a high-ranking executive. But people tend to make errors in reports, and this results in unclear or incorrect data. Robotic Process Automation (RPA) makes data management processes work without employees being involved. The result is correct data, reported on time.

Here are a few of the processes in regulatory reporting that can be optimized thanks to AI instruments:

• Data validation
• Analytical calculations
• Categorization and classification
• Data processing and preparation
• Regulatory change management, etc.

Automation of these activities results in significant time- and cost-savings.

Transaction monitoring

This is the process of monitoring financial transactions that go through banks, online shops or other financial institutions to identify suspicious activity and flag it as illegal. There’s normally a separate department in a bank that performs this work. They have certain standards regarding what should be considered suspicious. Like the previous point about reporting, RPA can analyze and monitor transactions faster and more accurately than any professional.

As you can see, most solutions, regardless of the category, utilize RPA, Big Data Analysis, AI, and Machine Learning.

If you’re interested in exploring the role of Python in fintech, particularly in the field of RegTech, check out our another informative article.

The Importance of Regtech in Fintech

Regtech has emerged as a crucial tool for the fintech industry, enabling financial institutions to navigate complex regulatory frameworks and effectively manage compliance and risk. In an increasingly regulated environment, regtech solutions offer innovative ways to streamline and automate processes, ensuring adherence to ever-evolving compliance standards.

By combining the strengths of regtech and fintech, companies can meet their regulatory obligations efficiently and cost-effectively. These advanced technologies leverage AI, ML, and big data analytics to monitor transactions, detect suspicious activities, and identify potential risks in real-time. By automating compliance processes, regtech enables financial institutions to reduce human errors and operational costs while enhancing accuracy and effectiveness.

Furthermore, regtech in the fintech industry empowers organizations to stay ahead of regulatory changes. Compliance requirements are continually evolving, posing challenges for financial institutions to keep up with the latest rules and regulations. Regtech tools provide timely updates and alerts, ensuring that fintech companies remain informed and can adapt their processes accordingly. This proactive approach helps mitigate compliance risks, prevents penalties, and fosters a culture of regulatory awareness within the organization.

Implementing RegTech

The need for RegTech solutions arises from a number of issues most companies face. Let’s consider the most common challenges and the ways RegTech industry helps to meet them:

Stage #1: Manual operations

All these benefits are driving more and more businesses to search for RegTech experts that can optimize regulatory management. So let’s look at the stages a company can go through when implementing RegTech tools.

It’s the primary stage of managing all regulatory activities, and today it can be compared to cave painting. Well before AI and machine learning turned the industry upside down, nearly all companies used Microsoft Excel for data capturing, reporting, and auditing. Some firms still use it to collect and manage regulatory data. Obviously, this slows down the compliance processes.

Stage #2: Workflow automation

When entrepreneurs realized that Excel cannot possibly keep up with ever-changing regulatory requirements, RegTech development started to evolve. This is when banks started using software solutions for auditing, regulatory reporting, and other compliance tasks they used to perform manually.
MetricStream was among the first to appear, in 1999, and remains the most popular RegTech development company. It’s a comprehensive solution for risk, quality, and compliance management. Along with MetricStream, two other pioneers of compliance workflow automation emerged: Ripcord and Workfusion.

Stage #3: Ongoing tracking and monitoring

Over the past decade, banks moved on to the next stage of RegTech implementation — ongoing monitoring. This allows them to fill in the compliance gaps caused by the large number of constantly arising regulatory requirements. Thanks to real-time tracking, companies can instantly respond to the new regulations and reduce the potential risks of non-compliance.

Stage #4: Predictive problem-solving

After the rise of artificial intelligence and machine learning, RegTech engineers started using these technologies in their software. AI enables smart analytics, proactive risk estimation, and so-called compliance intelligence. Today, companies have much more powerful tools they can use to keep up with regulations and predict and eliminate potential risks.

Read more: Why Python is used in Artificial Intelligence

Key Players in Regtech

The Regtech industry has witnessed significant growth in recent years, with numerous companies emerging as key players in this field. These companies offer innovative solutions to assist financial institutions in meeting regulatory requirements and managing compliance effectively. Here are a few examples of regtech companies making an impact in the industry:

• ComplyAdvantage. ComplyAdvantage utilizes artificial intelligence and machine learning to provide real-time risk intelligence solutions. Their platform helps businesses in identifying and mitigating risks associated with money laundering, terrorist financing, and other financial crimes.
• Onfido. Onfido specializes in digital identity verification and authentication. Their advanced technology combines biometrics, machine learning, and document verification to enable secure and frictionless customer onboarding processes, meeting KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements.
• Behavox. Behavox focuses on compliance monitoring and employee conduct solutions. Their platform leverages advanced analytics and natural language processing to detect and prevent regulatory breaches, insider trading, and other misconduct within organizations.
• ClauseMatch. ClauseMatch offers a comprehensive regulatory technology platform for managing compliance and documentation. Their solution enables financial institutions to streamline the creation, collaboration, and tracking of policies, procedures, and internal controls, ensuring regulatory alignment.
• RegTek.Solutions. RegTek.Solutions provides regulatory reporting solutions to streamline reporting processes for financial institutions. Their platform automates data validation, enrichment, and submission, ensuring accurate and timely reporting in compliance with regulatory requirements.

These examples represent just a fraction of the diverse range of regtech companies operating in the industry. With their innovative technologies and solutions, these key players are driving the transformation of regulatory compliance in the financial sector, helping organizations navigate complex regulatory landscapes more efficiently and effectively.

Examples of RegTech Solutions for Banking and Fintech

In this section, I’ll provide you with a few concrete RegTech examples and explain how they help businesses. Despite the areas that Deloitte has identified, most solutions are cross-industry and comprise several technologies that solve a set of problems in a particular industry. However, my list includes five companies that best fit banking and fintech companies.

Provenir is a risk analytics system that integrates with, as the founders claim, “virtually any structured and instructed data source quickly” and creates risk analyses based on preset parameters. By data source, they mean that they can operate with Twitter, Facebook, Salesforce and many other tech giants. The great thing about Provenir is that it can be used in a variety of different industries, from e-commerce websites to banks. By the way, HSBC is its largest client, which makes it one of the best RegTech examples in the banking sector.

Continuity is a US service that provides regulatory compliance services. The system monitors the US Federal Register and, depending on the client’s business area, interprets changes to the regulations that apply to the client company. So instead of hiring a huge compliance department, a company can use Continuity to save staff time. Moreover, Continuity offers a Unified Compliance Management System Model. You just schedule compliance tasks, and the compliance management process becomes automated.

IdentityMind provides a platform that performs a KYC process: it finds, maintains, and analyzes digital identities, which allows companies to identify a person, perform regulatory identification, and detect and prevent identity fraud. For commercial businesses, it means fewer frauds and protection from money laundering. They also have a base of 20 partner companies that provide data, services, and technology to support larger data operations.

Luxembourg is famous for two things: it’s one of the smallest European countries, and it has an excellent economy. It’s no wonder that Luxembourg is the home to Regis-TR, a RegTech development company that offers a reporting system for all kinds of trade transactions for various assets in the EU. Their reporting system is compliant with three regulations: EMIR, FinfraG, and SFTR. The company plans to create an ecosystem that enables clients to report their data to only one entity at a time and not violate any requirements in different jurisdictions.

Feedzai, as its founders describe it, is an “AI platform to fight financial crime.” Simply put, it detects fraud in omnichannel commerce by offering banks and commercial businesses payment processors protection. They use historical and behavioral analysis of data to identify whether a transaction is potentially suspicious or not.

As you can see, RegTech isn’t something vague and unclear. It’s just that the entire RegTech industry is B2B, so consumers are unlikely to ever come across it.

Django Stars Experience in RegTech Development

Django Stars has been providing product development services since 2008. In fintech, one of our priority industries, compliance with regulatory requirements is an essential part of creating software. Our engineers’ track record includes, for example, regtech-related development for:

• an Australian cloud and cybersecurity service provider Smile IT that helps companies prepare for CMMI and comply with regulatory requirements,
• Swiss Fin Lab that builds solutions for managing personal data and personal wealth, and
• an Irish Regtech Miura that provides automated regulatory compliance and automated reg change management services.

Bottom Line

RegTech is software that helps companies, primarily FinTech ones, comply with established regulations. Most solutions rely on the continuous utilization of machine learning and AI in Financial Services to exclude human error from regular processes like reporting and risk management.

The RegTech market isn’t stable, since governments tend to establish new regulations every year, based on technological progress. Think about the crypto market. Ten years ago, nobody attempted to regulate it. Over the last three years, governments have been trying to figure out how to control it. This clearly demonstrates that RegTech is just starting to develop — and that the more regulations that hit the books, the more solutions we’ll see.

If you’re looking to leverage opportunities in the growing RegTech industry, contact Django Stars. Our experienced team can help you build innovative software solutions to navigate regulatory challenges and stay ahead of the curve.