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.