RegTech: A Solution for Banks or Just Another Hurdle?

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By: Cambridge Lestienne,

There is no question about it, we are officially in the midst of a FinTech revolution.

FinTech – the commonly used shorthand referring to financial technology – is the intersection between financial services and technology.[1] Applicable to various business areas, it involves the use of cutting-edge technology to design and deliver financial services and products tailored to each business and customer base.[2] Though relevant to big banks and other businesses alike, the area is predominantly characterized by countless focused start-ups.[3] You have likely heard this term around a lot lately in light of the boom it’s been experiencing in recent years. Back in 2010, when FinTech was first making its way on the scene, investments in the sector were valued at $1.8 Billion.[4] However, as of mid-August 2016, investments had reached as high as $15 Billion.[5] While this boom in investment as has been focused on lending and payments, other areas, such as insurance, wealth management and corporate finance, have yet to be as significantly impacted.[6] The reason for which being the heightened regulation that exists in these areas following the financial crisis of 2008.[7] Enter RegTech.

In parallel with its aptly named predecessor, RegTech refers to the intersection between regulation and technology in order to address regulatory challenges faced in the financial industry.[8] As regulation surrounding the financial services industry has become more and more heightened, and the focus of compliance programs has shifted to data and reporting, investment in RegTech firms is becoming increasingly valuable.[9] One of the driving factors in such investment has been cost reduction. It is estimated that some of the world’s largest and most notable banks, such as HSBC, Deutsche Bank and JPMorganChase, spend in excess of $1 Billion annually on implementing compliance and controls related to regulation.[10] Cost savings are not the only benefit for companies investing in RegTech. In a recent publication, Ernst & Young identified eight compelling benefits of incorporating RegTech into current compliance and risk management practices.[11] These benefits were broken down in terms of short-term and long-term. The short term benefits were identified as: (1) reduced cost of compliance; (2) sustainable and scalable solutions; (3) advanced data analytics; and (4) risk and control convergence.[12] In the long-term, E&Y found that RegTech would benefit companies through: (1) a positive customer experience; (2) increased market stability; (3) improved governance; and (4) enhanced regulatory reporting.[13]

While the benefits of investing in RegTech may be numerous and compelling, banks and other institutions should be sure to do their due diligence.[14] Because the industry is so highly regulated, it will be important that banks keep regulators in the loop as they form relationships with these new RegTech firms.[15] However, despite this caution, the Office of the Comptroller of the Currency, one of the primary regulators for national banks and federal thrifts, has noted that there is significant opportunity for technology to reduce the costs incurred and increase efficiency.[16] Specifically with respect to the Bank Secrecy Act and Anti-Money Laundering.[17] Only time will tell if we will see the same boom in RegTech as we have in FinTech. Though seemingly primed for success, so much will depend how the regulatory environment changes, if at all, under the impending Trump administration.

 

 

[1] See PricewaterhouseCoopers LLP, FinTech Q&A, 3 (2016), https://www.pwc.com/us/en/financial-services/publications/viewpoints/assets/pwc-fsi-what-is-fintech.pdf.

[2] See Matthew Blake, Dustin Hughes, Peter Vanman, 5 Things You Need to Know about FinTech, World Econ. Forum (Apr. 20, 2016), https://www.weforum.org/agenda/2016/04/5-things-you-need-to-know-about-fintech/.

[3] See Deloitte, RegTech is the New FinTech: How Agile Regulatory Technology is Helping Firms Better Understand and Manage their Risks, 4 (2016), https://www2.deloitte.com/content/dam/Deloitte/ie/Documents/FinancialServices/IE_2016_FS_RegTech_is_the_new_FinTech.pdf.

[4] See Nikolai Kuznetsov, What’s Next for FinTech?, Forbes (Nov. 22, 2016, 10:22 AM), http://www.forbes.com/sites/nikolaikuznetsov/2016/11/22/the-next-phase-in-fintech/#4379a6554a29.

[5] See 54% of Incumbents Say FinTech Partnerships Have Boosted Revenue, Bus. Insider (Nov. 28, 2016, 12:14 PM), http://www.businessinsider.com/54-of-incumbents-say-fintech-partnerships-have-boosted-revenue-2016-11.

[6] See Kuznetsov, supra note 4.

[7] See id.

[8] See Deloitte, supra note 3.

[9] See id.

[10] See Martin Arnold, Market Grows for ‘RegTech’, or AI for Regulation: Artificial Intelligence and Biometrics Help Banks Comply with Rules, Fin. Times (Oct. 14, 2016), https://www.ft.com/content/fd80ac50-7383-11e6-bf48-b372cdb1043a.

[11] See EY, Innovating with RegTech: Turning Regulatory Compliance into a Competitive Advantage, 8-9 (2016), http://www.ey.com/Publication/vwLUAssets/EY-Innovating-with-RegTech/$FILE/EY-Innovating-with-RegTech.pdf.

[12] See id. at 8.

[13] See id. at 9.

[14] See Katie Wechsler & Zachary Luck, The Federal FinTech Promised Land, 19 No. 4 Fintech L. Rep. NL 2, (2016).

[15] See Matthias Memminger, Mike Baxter, Edmund Lin, You’ve Heard of FinTech, Get Ready for ‘RegTech’, Am. Banker (Sept. 7, 2016), http://www.americanbanker.com/bankthink/youve-heard-of-fintech-get-ready-for-regtech-1091148-1.html.

[16] See Wechsler & Luck, supra note 14.

[17] See id.

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