Technological innovation is taking place across all industries and financial services is also in the middle of a major disruption era. In this cut-throat consumer age, companies must provide slick digital solutions that cater to their customers’ increasing wants and needs. Similarly, as the regulatory technology (regtech) industry continues to evolve based on wants and needs, we will see a shift in the perception of regulation - from being a burden to an actual value-add for institutions.
The financial services landscape is evolving at speed thanks to emerging technology trends, from data analytics, application programming interfaces (APIs), to blockchain, machine learning and artificial intelligence (AI). A clear and seamless digital user experience has helped convenience to become an even more important customer standard. It’s a standard that new market players such as neobanks, with their lean technology infrastructure and tech-savvy marketing practices have put at the heart of their businesses, and it is threatening the brand loyalty stronghold once tightly held by traditional banks.
Whilst challenger account sign-up rates are rapidly rising, trust in wholly digital financial products and services remains an issue. This has ostensibly thwarted open banking adoption or indeed the challengers from making incumbents obsolete. In fact, trust in all types of banking institution remains a global issue. After all, many people are still feeling the effects of the 2007-08 financial crisis, with a certain resentment towards banks globally.
Meanwhile, online fraud and data security are an omnipresent concern for individuals and institutions alike. After various high-profile incidents of data misuse in the media, such as The Facebook-Cambridge Analytica scandal, there is justified skepticism that companies are not looking after the customer data they hold or are simply failing to comply with regulatory standards. Could regtech be the panacea that both consumers and institutions have been looking for? If regtech continue to position their solutions as convenient and trustworthy, this relatively young industry could well be. But what are the skills and concepts needed to do this?
Trust must be earned
Trust must be earned, or so they say, and who better to promote regtech adoption than the regulators? This is happening across many of the world’s largest fintech hubs. Indeed, the UK’s Financial Conduct Authority have called for input from startups, banks and technology providers to heed the modernization of regulatory reporting by holding tech sprints with the Bank of England.
The Monetary Authority of Singapore and Financial Industry Regulatory Authority in the US are also actively encouraging the development of regtech solutions. Their enthusiasm is sending a message to institutions that the past ways of reporting are no longer fit for purpose in today’s fast-evolving markets.The more regulators are vocal about regtech, the more institutions will take action. Equally, a bank which has chosen to embed regtech will stand out as prioritizing compliance in the eyes of a regulator.
Regtech can also gain credibility in the market by partnering with the wider financial services ecosystem. Well-established advisory firms for example, typically have deep regulatory and industry expertise, along with a track-record of delivering needs assessments and custom end-to-end transformation programs (i.e. operational, IT, risk and governance). They can also offer system customization and aftercare for an optimal, simple and efficient set-up that fulfills both the regulatory obligations and business flows. Regtech that are therefore working in tandem with advisory firms could provide an additional layer of assurance to those wishing to implement new solutions.
Biases must be overcome
However, for many organizations, the biggest obstacle to implementing regtech will be overcoming the conservative bias that exists at management level. It is no secret that traditional financial services companies are more likely to be risk averse, given their board composition and especially in the aftermath of the financial crisis, where scrutiny on costs and risk are tight. Consequently, they can be resistant to implementing new technology and ways of working, especially when it will mean a large financial investment and disruption to business as usual. Some organizations also have long trial and assessment cycles to adopt new IT solutions. As a result, the decision to make a step-change is often put on hold and all the while more reporting errors are made, risks escalate and too many FTEs are assigned to manual tasks.
… And new techniques adopted
But in an economy where margins are tight and the competition to innovate is fierce, it will become harder for traditional market players to maintain market share. Indeed, fragmented financial regulation costs 780 BN USD on global economy, with compliance costs averaging 7 percent of banks’ revenues worldwide. Regtech adoption can diminish these to just 1-2 percent because they eliminate manual data harmonization processes (often causing operational errors and lost time). Thanks to digitalization, banks can assign more time and resource on research and development, customer journey and ultimately growth.
In addition to the enhancement of Governance, Risk and Compliance process, regtech allows exponential development of business thanks to a technique known as ‘growth hacking’ for the adopting banks. This involves companies forming multi-disciplined teams, typically comprised of developers, customer support, project management, marketing and sales, to continually test and refine their products (internally and externally) to make them evolve in a more agile way and eliminate customer pain points. All the while, they are constantly keeping an eye on the latest trends, what their competitors are doing and the market at large.
Automation of processes
The growth hacking mindset that regtech typically employ has allowed them to transform the customer journey, from onboarding through to everyday user experience. Indeed, to sign up for an account with a regtech - or a neobank underpinned by regtech - takes just minutes, instead of days, like in a traditional bank. This can all be performed in-app, and that includes security identification and fraud prevention too. What is this wizardry, you might ask? Essentially, it works through the automation of know your customer (KYC) processes.
On a day to day basis, end-users can benefit from a simple and safer customer experience. Indeed, groundbreaking technologies such as conversational artificial intelligence (AI) allows companies to run real-time analysis of speech. This not only helps to detect fraud (i.e. through voice recognition) but better understand customer mood and sentiment so new insights can be learned and applied to create more tailored products.
Automation additionally helps regtech to recognize patterns in their data across the business and harmonize it, thus improving the quality of reporting and overall regulatory compliance effectiveness throughout an organization. For banks that have struggled with a lack of integration across workflows and regulatory reporting for so long, this is positively revolutionary. Indeed, it has been reported that only between 1 and 10 percent of the data processed by financial institutions is actually used. An integrated solution that uses technology like artificial intelligence will help businesses to make the most of the data they hold by funnelling more information into insight.
Lastly, businesses will want to feel that implementing regtech will be worth their while. Every day, new technologies are showing us that analyzing data in the process of compliance is adding value far beyond just that. Indeed, it has been estimated that putting the benefits of efficiency and added value together means a regtech implementation can promise a 600 percent return on investment in less than three years.
Regtech may still be a relatively young industry, but in a small space of time it has started to prove that it has the potential to fulfil a number of key requirements that financial services organizations today are struggling with; requirements and skills which are essential to competing in today’s markets, such as innovation, efficiency, and transparency. Meanwhile, the pressure of being compliant is not going away – regulatory demands are becoming more complex and stringent as time passes, and traditional market players and challengers alike are taking action. We believe that an innovative technology proposition combined with relevant governance, regulatory and compliance knowledge, which is offered together with an efficient deployment and maintenance is the winning 'market-pull' solution.
Partner, Capco Belgium