RegTech The next big thing

- GV Abhinav Kumar
Institute of Public Enterprise, Hyderabad

What is Regtech?
Regtech is a new concept primarily signifying the technology applied to resolve issues regarding
regulation within the financial industry. It helps banks and other financial services firms to better
manage and understand their legal risks as well to easily adhere to their regulatory obligations.

Why is this important?

Given the crisis situations a lot of big and small financial firms faced in the recent past either due to
global slowdown or through aggression, the regulators started being more conscious with the
compliance, governance and risks. The regulators have not only taken a take no prisoners
approach, but also increased the number and variety of regulations.
There is an assumption that there are 175,000 pages of regulations that the organizations
have to comply to. Taking out redundancies or the obsolete one, another study estimated 120,000
pages of regulation a bank has to comply by 2020. The recent example of large banks paying billions
of dollars as fine, compulsory public announcements of non-compliance have increased the risk of
the banks, both large and small to be alert in these issues.

Is this is a problem?
The larger banks who maintain assets larger than the economics of many countries of the world
have started increasing their compliance staff by at least twice. However, there is no syndicated
service offering to get the practices of the industry under one tree. There is an expected need for
man power with high talent. JP Morgan alone has 8000 employees working for anti-money
laundering purposes alone.
To counter the increasing expenses because of the compliance charges, the banks started
decreasing their focus on few of their banking activities like educational loans, mortgage activities
and some core banking activities.

How will Regtech solve these issues?

Though most of the banks have a separate wing for Governance, Regulations and Compliances
(GRC), they are not very effective. The main reason is that these divisions and their activities are not
connected to the customer facing divisions of the bank, even when customer experience aspects
scientifically impact the compliance risks today.
For example: on a customer on boarding process, KYC regulations have to be triggered. This
takes a lot of time for the legacy systems of the banks. This lag might become a reason for the
money laundering and many other problems the banks are facing right now.

RegTech companies come into picture by automating simplifying the process by pursuing straight
through processing. This will not only help them to decreases cost but also pace up the process.
Since, they act as a syndicate data collectors from third parties and also the other banks in the
industry, economics of scale help them in achieving their lower costs.
Few Regtech companies have grown into the field of just helping the regulators alone in
monitoring the financial services firms if they are meeting the regulatory requirements. They also
use the technology to help the regulators create predetermined responses by analysing various
banks capital adequacy ratios and the projections of the future based on machine learning and big
data analytics. Almost all the important central banks and important financial regulators in the world
like FED, Australian investments and securities commission, Central banks of Canada, England have
already started taking the help of Regtech firms in their activities.
Here, Technology is going to play a major role here. The Regtech companies are going to use
cloud for the banks to access only the data they want. They also create standardized interfaces with
remote login facilities, create advanced algorithms to understand the data patterns, both structured
and unstructured so as to create reliable signs for any threats beforehand.

Regtech is going to help the entire banking sector in the best possible way. Data can be at the
important contribution to Regtech. Data can be explained in two ways. One is getting important data
for banks and the other is using the existing data to create innovative solutions to the banks. The
Regtech companies also become an important liaison between the regulators and the financial
institutions creating spaces for the banks or other financial firms to create spaces where the firms
can test their new products without regulatory requirements. Then the regulatory can vary the
feasibility of such products, analyse the pros and cons of such products on the banks functioning and
the whole

Like all other disruptions, these Regtechs though they bring in a lot of ease for the banks to function,
there is enough reason for the banks to be cautions. This is because the dependency on the Regtech
would highly increase. The companies also would be on intense scrutiny from now on as they have
to share some information to create a syndicate network and this information will be accessible to
the regulators.
To

I believe that the Indian banks and the economy has not reached such a stage that the banks need
Regtech firms as a necessity now. RBI as of now has done a good job in being conservative from the
beginning. The encouragement for the Regtech cannot be expected in the near future from RBI. So,
it takes time for the industry to evolve and then develop a market for Regtech firms.