In the course of its operations, there are many aspects that a company must take into account to maintain a successful business. One of the most important is the use of technology for bringing efficiency and value to operations and the products and services it offers.
Moreover, digital evolution plays a fundamental role in a company’s level of competitiveness. Digital transformation, in fact, has increased competition between players who must be able to meet the needs of customers, who have become increasingly demanding.
On the other hand, digitization has also provided innovative and effective tools to grow your business. For this reason, words such as customer experience, customer journey, omnichannel strategy, and customer communication management have become part of the common language for those in marketing and corporate strategy. Digital transformation is fundamental for any company that wants to keep up with the times.
However, there is a word that is often little considered despite its importance, especially in light of the changes brought about by digitization.
When rules meet technology: RegTech
Here, we’re talking about the collision of regulation and technology: RegTech.
What do we mean by RegTech and what does it have to do with the digital transformation of companies? Answering this question is not easy because there is not a completely unified vision.
The first to introduce this expression was the Financial Conduct Authority (FCA), the main financial authority in the United Kingdom, which has the power to regulate the market for British financial products. FCA establishes minimum standards that all companies must adhere to and is charged with removing any of the products or services that may mislead the end consumer from the market.
In 2015, the FCA launched a public consultation on “Supporting the development and adoption of RegTech.” The results concluded that Regtech is a subset of Fintech that focuses on technologies that can facilitate the delivery of efficient and effective regulatory requirements. According to this definition, therefore, RegTech would be a “branch” of Fintech, as would Insurtech, which in turn concerns the integration of digital technologies in the insurance sector.
According to another interpretation, RegTech would be a separate and autonomous sector since it concerns distinct aspects of companies that are not necessarily linked to administrative and financial issues.
RegTech is the meeting of regulation and technology, which is used to support the procedures of reporting, adaptation, and compliance with internal rules and regulations.
2019: the year of RegTech
Today, Reg Tech has become increasingly important across the world.
In 2018, Accenture predicted that compliance investments would grow steadily and even double compared to the previous year; 2019 has been seen as a key growth period for the industry as a whole. While the market value of the RegTech segment was $2.3 billion in 2018, it is expected to exceed $7 billion by 2023, with a compound annual growth rate of 25.4% over the next five years.
Accordingly, there is an increasing demand for professionals specialized in this field.
This is not only limited to start-ups and tech companies but also concerns banks and traditional credit institutions, which in turn have found themselves having to cope with digital transformation and new European regulations.
What makes 2019 a key year for RegTech’s growth? We’ve identified three reasons, all closely linked.
The first reason is that banks continue to spend a lot on compliance to meet regulatory requirements against money laundering or to conduct in-depth customer due to diligence programs. RegTech is a great help in this respect, as it can significantly reduce these costs, making control processes faster and more efficient.
Take the case of anti-money laundering compliance. In this area, Regtech’s solutions help reduce the number of false positives during analysis, allowing compliance and risk experts to focus on more important issues.
The second aspect that puts RegTech on the launch pad in 2019 is that the solutions it offers are more adaptable and flexible than you might think. In particular, financial services companies have discovered that they can gain significant benefits from using these solutions outside of compliance.
For example, RegTech’s solutions based on automation, artificial intelligence, analytics, and other innovative technologies were used to manage certain non-compliance issues such as collecting and storing outstanding invoices and creating a more efficient billing system.
The third reason is that RegTech is, quite simply, necessary. In recent years, the regulations and requirements that companies must comply with continue to grow. Just think of some of the most recently issued directives and regulations, from privacy, to the security of digital banking payments, and the regulation of services and financial markets.
Operating in compliance with these laws is essential for the growth of your business, but it means additional bureaucracy, documents, and deadlines to be met. RegTech solutions, in this sense, allow companies to be more precise and punctual, thus saving valuable resources to be used in more profitable ways.
Let’s not forget, then, that being punctual, precise, and compliant not only ensures that the company avoids even more serious fines or penalties, but it’s also often is a necessary condition for carrying out certain activities.
RegTech solutions: from theory to practice
On closer inspection, the solutions offered by RegTech are based on all the main innovations made available by digital transformation.
It has been said that RegTech is the meeting point between regulation and technology and, for this reason, it is natural that it makes use of all the main innovations made available by technology: machine learning, artificial intelligence, big data analysis, predictive analytics, blockchain, and much more.
This, of course, allows you to provide services that can cover a wide range of needs and demands.
RegTech, in particular, helps to carry out this series of tasks more efficiently: the aggregation and management of various types of risk in a more effective and consistent way; the identification and interpretation of relevant regulations and related changes over time; the supervision of company operations so as to ensure compliance with current regulations; the control of all payment transactions for anti-fraud purposes; the implementation of anti-money laundering and anti-terrorist financing systems; customer identity checks; updating corporate compliance materials, and much more.
In this sense, therefore, also RegTech shows how the digital transformation, if properly exploited, can give a significant boost to companies, making more efficient the internal organization and, at the same time, increasing the competitiveness of the company itself, going to intervene on aspects that do not directly affect the production activity.
All this, of course, is achieved only if RegTech solutions have specific characteristics that make them decisive in terms of improving the internal organization of the business.
RegTech: 5 key characteristics
The success of your RegTech strategy also depends on the solutions you choose to adopt. What are the most important factors that should be taken into account?
- First of all, a solution must be agile enough to take an even disorganized set of information and combine it into a coherent cluster using ad hoc technologies.
- The second feature to consider when evaluating a RegTech system is speed. Compliance management and verification solutions must be able to be implemented quickly to minimize the time needed to achieve maximum use of the resource. Not only that. Speed is also essential during the day-to-day use: data extraction, transformation, and uploading must be possible in a short time, to allow rapid configuration and creation of reports and facilitate compliance with and scheduling of obligations and deadlines.
- The third key feature is adaptability. Regardless of the company’s structure and the digital ecosystem it uses for internal processes, automated compliance management software must be able to integrate and function perfectly without the need for additional expenses.
- Last but not least, RegTech’s implemented software must enable effective and secure management of big data, so that it is intelligible and usable to improve your business. In this sense, RegTech solutions must use specific technologies such as the cloud to ensure that data is backed up. The cloud has several significant benefits. The main benefit is cost since companies pay only for what they actually use. Secondly, cloud technology ensures considerable flexibility by providing the ability to customize how data is controlled. The third advantage is the scalability of these solutions, which can be modified depending on use by easily adding or removing features.
- Finally, RegTech systems that rely on cloud technologies guarantee a high level of reliability and security by ensuring that data is almost always accessible, even in the event of a sudden shutdown, and providing encryption to protect data during transfer.
RegTech is a specific segment of the larger Fintech market. However, this should not be misleading. In fact, this sector is destined to become increasingly strategic in the future.
The opening of the financial markets as a result of European Directive 2366/2015 and the spread of the Open Banking model encourages greater collaboration between digitally advanced players and traditional companies also to manage business compliance more efficiently. In this sense, it is no coincidence that, as noted by PWC, the number of RegTech start-ups in the last two years (from 2017 to 2019) represents 5% of the entire Fintech sector.
This is also a consequence of digital transformation. As they face a digital market, more companies need the support of companies whose technology skills are necessary to comply with the different regulations and to understand how the regulations can be used to make the business more efficient.
In essence, it’s a new market with new rules, and this also means that new know-how must be acquired. Also, for this reason, RegTech is closely linked to the digitalization of the economy. If you understand this, you can also understand why this segment is destined to become more and more relevant and to bring, in turn, even radical changes in the way companies do business.