Trulioo’s Stephen Ufford: Regtech is the sexiest part of fintech

Today’s episode is a first for the podcast. We’re talking about regtech, the technology that enables a lot of the other types of fintech — lending, moving money, investing. Our guest today is serial entrepreneur Stephen Ufford. He’s started and exited multiple companies in the consumer credit and data space. His latest endeavor is Trulioo, a Canadian regulatory technology firm that was cofounded in 2010.

Trulioo verifies online identity of individuals, enabling trust and safety online as fraud and compliance systems worldwide use this information for all kinds of financial purposes. We talk about different approaches to regtech, how these technologies will impact the financial industry for years to come, and Steve’s vision for vastly more democratized financial services and products.

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Below are highlights, edited for clarity, from the episode.

What is regtech?

I actually think regtech is sexy. It’s the enabler of fintech. Fintech is about money movement and services like lending and banking. The purpose of regulation is to prevent bad things from happening and to enable people to do more things. Giving access to credit is real important to making life go smoothly.  Regtech isn’t new — the notion of a credit file is decades old. You only have to know how important regtech is when you’re the guy who needs the money.

We think about how we can help businesses trust individuals enough that they can lend to them. We’re covering 4.5 billion people right now. That means that there are people in emerging markets, through all these tools, who can borrow money to start a small business. Those small dollar loans have been proven to impact generations to come. To me, that’s sexy.

The wily internet

The way the internet started was anonymous and many think it should be. With the upside that comes with anonymity, in terms of international trade, anonymity isn’t always the best thing. In an online environment, the same is true. The key is giving the option to people to remain anonymous when they want to and to be known when they think it’s appropriate.

I know firsthand one of the things that inspired Trulioo when we started it was a story I saw on CNN of a woman who walked 45 minutes each way to pay her electricity bill. She was standing there with Anderson Cooper and began crying after she was presented with her first mobile phone and Facebook account. They asked her why she was crying and she replied that the Facebook profile was the first time she ever existed on record anywhere. Because she existed and could be trusted online, she was able to get back hours to her life.

Establishing identity

The world looks at identity in a variety of ways. When we know a person, trust is established. The internet is built upon trying to read signals with fraud detection tools — what’s their phone number? Is the phone number involved in other frauds? The other way to do it is based on identity as perimeter. When you sit in a room with people you know, their purses and wallets are pretty safe. We need a layer that when you’re online, when you come online, you have the opportunity to be known. Once you’re known, a lot of the other friction goes away. Once that happens the purses and wallets in the room are safe.

WTF is regtech?

WTF is fintech

Financial services firms spend an astronomical amount of money on compliance and regulation. Dodd Frank’s 22,000 pages of rules and the recent Wells Fargo cross selling snafu just added fuel to a compliance fire already burning.

The six largest banks spent over $70 billion on regulatory compliance in 2013, practically doubling how much they spent just six years before. Last year, Spanish bank BBVA estimated that the average financial institution has 10 to 15 percent of its staff dedicated to compliance and regulatory activity.

The numbers continue to rise, along with compliance team headcount and fees paid to outside counsel.

So, what is regtech?

With all this cost and attention devoted to staying clear of the regulators, banks are looking for technology to help automate repetitive tasks like KYC and AML. Enter regtech, a general catchall term given to technologies that make financial firms smarter and faster in managing their regulatory and compliance responsibilities. These technologies have turned into a highly competitive market as top companies (here’s a list of 10 regtech firms gaining momentum) jostle to get the attention of financial institutions.

Sounds interesting, but is this really a new thing?

Well, not really. Banks have always had software solutions to help them stay on the right side of the regulatory road, documenting their activities. But, the rule books continue to get more complicated. On both sides of the Atlantic, financial firms will be forced to open up their data to third party apps, which puts major added focus on compliance. There’s even serious talk about issuing bank charters to fintech firms.

So, tech firms sense an opportunity.

So where are we in the hype cycle?

Consultants are breathlessly hailing a bull market in regtech. Deloitte has even coined regtech “the new fintech”. Hundreds of young firms have been formed to address the opportunity. According to CB Insights, there has been roughly $2.2 billion invested in regtech since 2012. Research firm Celent believes the industry could grow to $72 billion by 2019 from $50.1 billion in 2015.

While things are getting exciting, we still have a long way to go. It’s too early to see where the industry is headed and who the obvious winners will be.

What type of technologies are being used in regtech solutions?

The usual cast of suspects is at work here. As financial firms produce mountains of information every day, big data solutions are being used to centralize and prepare data to be shared with the regulators. Identity management has become a major regtech theme. Trading floors are being subjected more intensely to conduct monitoring. There are even robots that read through contracts.

Solutions like these are predicated on artificial intelligence, machine learning, and cloud computing.

This all sounds good for the banks, but does it impact customers?

Certainly, regtech can help lower the costs of compliance by automating parts of the process. But, in theory, it should also improve outcomes for clients of financial institutions. If data is more secure and identities safer, there should be less chance that accounts are compromised.

We’re at a point in history where consumers are asking for more access and transparency from their financial services. But giving them what they want increases the risk of that information leaking (or getting hacked) out. Regtech done right should help.

SEC demands more transparent reporting from funds, ETFs

The SEC recently approved the final rule of the Investment Company Reporting Modernization package that aims to enhance data reporting for mutual funds, ETFs and other registered investment companies.

The new rules require, among others, data points that might not have been collected in the past to be submitted to the SEC with greater frequency.

The information will be reported in a structured data format, which will allow the SEC and the public to better analyze the information.  The rules also will require enhanced and standardized disclosures in financial statements and will add new disclosures in fund registration statements relating to a fund’s securities lending activities.

“Perhaps one of the most important elements of today’s rule is how we ask registered funds to provide the reporting,” said SEC Commissioner Kara M. Stein following the adoption of the rule. “Funds will submit the new forms in a structured, XML format. This means that, while the information can be read by a person, it can also be easily processed by computers for analysis.”

The rule also embraces the use of the legal entity identifier, or LEI. The LEI is a way to uniquely identify financial market participants across reports and across markets.

“With thousands of registered funds and trillions of dollars in assets, LEI will help enhance both fund identification and analysis. Wider use of structured data and LEIs will enable market participants, the Commission, and other regulators to make the most of limited resources and better understand the data being reported, ” Stein added.

Moving to structured data should, in addition, lower the barriers of entry to the commercial data business, thus lowering prices for investors and spurring innovation, explained XBRL US, a nonprofit national consortium for the business reporting standard, in comments before the rules were approved.

Though the initial cost of reporting will be borne by the reporting funds, the overall reduction of costs to all participants should end up saving money over time.

Market players generally welcomed the new requirements but bemoaned the burden of data collection. The new reporting format will not significantly change the compliance work, as regulatory forms are submitted electronically under the current regime. Data gaps and silos, and a more frequent reporting schedule are the main challenges.

Many vendors, like Assetlogic or Cube, offer regulatory reporting solutions, in an attempt at lowering the costs and pain of developing such solutions in house. These cloud-based solutions collect and aggregate data from a company’s systems and enable easy data management for regulatory purposes. Moving a firm’s data to one central repository also has benefits for marketing and customer services applications.

Other vendors, like Agile Reporter, offer automated reporting, in addition to data management, saving fund managers more pain when dealing with regulators.

The regtech market, as these companies are referred to collectively, is a growing category, fueled by the harsh post-crisis regulatory environment. According to a Medici report, the global demand for regulatory, compliance, and governance software is expected to reach $118.7 billion by 2020.

Hi Five! The five fintech stories we’re following this week

5 trends we're tracking in finance

Venmo, behind you: incumbents are taking on P2P startups

It was only a matter of time, really. Though peer-to-peer payments have primarily been the focus of fintech startups, incumbents are delving into this market via clearXchange, a white label P2P payment platform for financial institutions.

Instead of developing a P2P payment product in-house, 5 of America’s top banks (including Chase and Bank of America) have signed up to the clearXchange network. So far, customers can only send money to other of the bank’s customers via the platform, but eventually they’ll be able to send to family and friends who bank elsewhere.

Chase’s Jamie Dimon famously said that he expects to win at payments; Chase’s integration of clearXchange into its existing banking apps is one indication of just how they’re planning to do that.

Turning non-customers into customers with mobile apps

It’s tough to market a bank – especially when so many millennials have lost faith in financial institutions. A new marketing tack that banks are testing out is a line of mobile services aimed at non-customers. The idea is that these mobile apps will cultivate more frequent, deeper engagements with non-customers, which will eventually lead to converting them into customers.

Whether this mastermind marketing plan will yield the desired results remains to be seen. In the meantime, ZEO, TCF Bank’s suite of services offered to all humans (customers and non), has been a big hit with existing customers – this in itself could entice more non-customers to the platform and to the bank itself.

Roboadvisors are a game changer, but at what cost?

This week, Betterment became the first independent roboadvisor to surpass $5 billion in assets under management. Well done, Betterment, but beware: this is also the week in which a report on the just how unprofitable roboadvisors are went live.

The report by UK asset manager Alan Miller was (wrongly, we think) largely ignored by the media, but its findings demonstrate that roboadvisors’ business models are extremely problematic: it can take up to 11 years for a roboadvisor account to become profitable, and a UK robo spends an estimated £2,794 over the life of an account.

This might not be a big deal for incumbents who have spun off or acquired a robo, but for smaller robo independents, these costs could be a long-term death sentence.

Regulation technology is coming into its own

Whether you’re an established incumbent or a hopeful startup, the double whammy of state and federal financial regulations can be overwhelming. Luckily, there’s tech for that: meet regulation tech (better known by its stage name, regtech).

Though it might not be the sexiest technology, regtech helps companies of all sizes from across the finance industry jump through flaming bureaucratic hoops, such as registration requirements, license fees, training requirements, and staffing rules. Tradestreaming’s Gidon Belmaker lays down the regulation challenges finance companies are facing and pinpoints the top 10 regtech companies that are steadily gaining momentum.

Globalization is speeding along multi currency solutions

Brexit aside, globalization has allowed more people than ever before to spend and shop in foreign currencies. This trend has obviously led to an increased demand for online and mobile money exchange solutions, and the UK fintech mavens haven’t disappointed:

Revolut, launched in 2013, is a multi currency payments platform that enables you to exchange, send, and spend your money while avoiding foreign banking fees without using a bank. The Revolut app, combined with a prepaid MasterCard, lets users load money from the bank account in their domestic currency and spend it in 90 different currencies across the globe – including bitcoin – at the interbank rate. Revolut just raised over $8 million from big-name investors and also has raised more than $11.7 million through pledges via a crowdfunding campaign.

Perhaps following a frustrating experience of returning from, say, London, with 20 pounds and nothing to do with them, WeSwap, a P2P platform, is touting cheaper travel money for all with its app that enables travelers to directly swap currencies with one another. The company is fresh off a $10 million funding round, and its CEO is confident that English fintech can prevail in spite of the Brexit referendum.

Photo credit: Loozrboy via Visual hunt / CC BY-SA

10 regtech companies gaining momentum

Following is a list of notable regtech companies

Regulation is an expensive pain point for financial institutions. Some estimates put a price tag of up to a billion dollars on compliance-related tasks for large banks. Other estimates assert that over 10% of the workforce in financial institutions deals with compliance.

It is not surprising that an entire ecosystem of software solutions emerged in recent years to assist financial institutions in streamlining and automating regulatory activity. The demand for regulatory technology, or regtech as these solutions are often referred to, is expected to reach $118.7 billion by 2020, according to a Medici report.

The following is a list of notable regtech companies that are gaining momentum:

  • Ayasdi: Ayasdi is a big data and analytics company that helps financial institutions with their risk management and modeling, making it easier to comply with Basel 3 and required stress testing. Among the company’s customers in the financial industry are Citi and Credit Suisse.
  • RedOwl Analytics: The RedOwl human risk analytics platform is used by information security and regulatory surveillance teams to mitigate the threat of malicious insiders. The company’s behavioral analytics platform integrates structured and unstructured data sources, providing visibility of human risk across the enterprise. The company was honored as an innovator in Security Innovation Network’s 2016 conference.
  • Onfido: The company provides KYC (Know Your Customer) background checking for financial institutions available on any device. This enables companies to better service their customers while staying compliant with regulations. The company was features on the Fintech50 2016 list
  • Trulioo: Trulioo provides ID verification for more than 400 companies to comply with KYC and anti-money laundering rules. The company counts as clients some of the world’s top payments, e-commerce, and financial service providers including PayPal, Stripe, Square, WorldRemit, Kickstarter, Braintree, and Amazon. The company won ‘Best Identity Verification and Authentication Solution’ at the 2016 CNP awards
  • Elliptic: The company aims to transfer the rigorous security and compliance standards of traditional finance to the world of digital currencies. Elliptic was featured in the KPMG Fintech100 list.
  • IdentityMind: IdentityMind has developed a comprehensive regtech platform to meet fraud prevention, AML, KYC, underwriting, sanctions screening and merchant portfolio risk analysis needs and requirements. The company claims it can help reduce account fraud at the onboarding stage by as much as 95 percent, and reduce manually reviewed transactions by as much as 80 percent.
  • Fintellix: Fintellix provides risk monitoring & regulatory reporting in various countries. The company, headquartered in Bangalore, services major clients in the US, Europe, the Middle East and India. It is backed by major venture capital majors, Sequoia Capital and IDG Ventures.
  • Ancoa: Ancoa provides contextual surveillance and analytics for exchanges, regulators, brokers and trading desks. The company’s software platform detects market abuse, gives insight on insider trading, and provides visibility of trading behavior in real-time and thus, provides a tool for automated auditing of transactional data. The company was awarded ‘Best Market Surveillance Product’ at the 2016 Operational Risk Awards.
  • AQMetrics: AQMetrics is an integrated risk management, regulatory compliance and surveillance software provider. Using AQMetrics, firms can track investor activity, orders, executions and holdings, and receive risk alerts and notifications of compliance breaches.
  • ComplySci: ComplySci uses web-based corporate compliance technology that leverages data networks and forensic analytics to monitor employee risk and automate code of ethics compliance. ComplySci protects its customers from reputational damage and revenue loss from non-compliant activities.

Photo credit: plewicki via / CC BY-NC-SA

Regulatory compliance: an expensive pain for both incumbents and entrants

compliance can cost a financial institution over $1 billion every year.

Being an entrepreneur is hard. Being an entrepreneur trying to break into one of the most heavily regulated industries is herculean. Fintech founders launching a new product face so much regulatory red tape that it has the power to change business models or even question the viability of products.

Established financial institutions face similar, if not harsher, regulations. On this backdrop, a new field of regulatory software, or regtech, is changing the way companies operate.

Breaking into the market

Firms in the U.S. have to take into consideration both state and federal regulations. For online companies, who naturally service clients across the US, this adds a prohibitive level of complexity.

The fundamental problem, as in many other industries, is that regulation is having a hard time keeping up with technological developments.

“The current system of bank regulation was enacted in the early 1930s,” states a new report by Financial Innovation Now, a public policy coalition comprised of Amazon, Apple, Google, Intuit and PayPal, that details current state and federal regulatory compliance requirements for new marketplace innovators.

To illustrate how onerous state and federal regulatory compliance requirements can be for new entrants, the report confronts the fate of two hypothetical innovators: a payments security technology and an alternative small business lender.

Registration requirements, license fees, training requirements, staffing rules, and other such regulation differ from state to state. A new lending service will need to register in each state separately, as well as manage reporting and oversight for its activities.

Partnering up instead of going alone

There is no escaping financial regulations. Even if the startup online lender wants to avoid the compliance headache by partnering with an existing bank, it will be subjected to examination by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. In addition, the fintech upstart must open up its underwriting processes to examination by bank regulators and is subject to periodic audits by the bank to make sure that it does not create a risk to the bank.

An online lender also needs to comply with at least 16 different federal laws.

“Although well intended,” the report states, “the underlying laws, regulations and regulatory interpretations are often slow to adapt to technological change, creating barriers to innovators who wish to bring new products and services to market.”

Incumbents feel the pain

Regulatory hurdles are not only a concern for fintech startups. Established banks and multinationals also need to face an increasingly complex and expensive environment of rules and regulations.

According to The Institute of International Finance (IIF), compliance can cost a financial institution over $1 billion every year. Spanish bank, BBVA estimates that for financial institutions, 10-15% of their total workforce is dedicated to governance, risk management and compliance, making these activities a huge cost center.

Regulations are also getting increasingly punitive: consulting firm, McKinsey found that regulatory fines and settlements in 20 large US and EU universal banks increased by 45x in the 2010-2014 period.

Enter regtech

It is not surprising that an entirely new industry has emerged to support the compliance activities for incumbents and new entrants alike. RegTech, or regulation technology, allows for agile deployment of compliance solutions, and automates much of the reporting process. The global demand for regulatory, compliance, and governance software is expected to reach $118.7 billion by 2020, according to a Medici report.

Unlike most other fields of innovation, regtech requires cooperation from regulators from the get-go to be successful. Building the right solution requires all stakeholders, financial institutions, regtech vendors and regulators, to work together. In Europe, for example, the FCA opened a regulatory sandbox to firms, providing a safe space for testing innovative products and services.

Onboarding regtech is a slow process because it affects many aspects of the organization. Achieving regulatory agility is key for any future fintech development. As institutions, vendors, and regulators establish best practices, we can expect greater innovation.


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