Streamlining Compliance in the Digital Banking Era

Do you remember the last time you visited the local branch of your bank? For many, because of the rise of the digital banking era, there is no longer a reason to visit a physical bank location. Every type of financial transaction, whether purchasing mutual funds or paying utilities, can be done from anywhere in the world using a computer or smartphone.

Because of the increased use of new technologies like online banking, mobile payments, and algorithmic trading, the financial industry has undergone a dramatic transformation in recent years. As a result of this large-scale transformation, new regulations are needed to help prevent fraud and, ultimately, to help protect consumers.

However, although most experts agree that new regulations are crucial to keeping up with the changing landscape of the digital economy, they can also be burdensome to some financial institutions. This is especially true for newer FinTech startups that may not have the resources to monitor every transaction on their own or may not have the capital needed to maintain an experienced compliance team.

So, how do financial institutions and financial technology companies handle the immense responsibility of compliance in the digital banking era? Easy, they outsource compliance to the RegTech industry.

What Is RegTech, and What Is Its Role in the Financial Services Industry?

RegTech, or regulatory technology, is the technology used to manage processes like regulatory monitoring, reporting, and compliance within the financial services industry. The purpose of RegTech and its continued development is to help financial institutions and financial technology companies comply with regulations more effectively while helping to minimize costs.

Using technologies like artificial intelligence, machine learning, blockchain, and cloud computing, RegTech companies can provide various SaaS products to financial institutions to help monitor digital transactions in real-time. By automating the monitoring of massive amounts of data, such as digital financial transactions, in real-time, regulatory technology software can help flag irregularities or potential issues that may indicate financial fraud or an attempted data breach.

After the potential fraud or attempted data breach has been detected, a follow-up internal investigation can be conducted. This automated detection process provided by RegTech can help businesses allocate their resources more efficiently by letting them know where potential fraud may have occurred and helping them identify potential systemic vulnerabilities that need to be corrected.

Another consequence of the rise of the digital banking era is significant increases in financial fraud and cyberattacks. The financial industry is a favorite target of many hackers, as successful data breaches and cyberattacks can lead to large payouts.

Cybercriminals are constantly developing new ways to infiltrate financial institutions to steal consumer data and make fraudulent transactions. The number of data breaches, cyberattacks, money laundering schemes, and embezzlement attempts that the financial services industry regularly faces continues to rise.

As a result, financial authorities and regulatory bodies have increased regulations and created new compliance initiatives to help address the issue.

Again, without the help of the RegTech industry and the way it is streamlining compliance, many financial institutions would be faced with a monumental task that would be extremely expensive and almost impossible to manage on their own.

It is the RegTech industry that then serves as the intermediary between financial institutions and regulatory bodies to automate and streamline compliance to make it cheaper for businesses and to protect consumers from theft, fraud, and data breaches.  

Opportunities in the Growing RegTech Industry

The RegTech market had an estimated value of $7.6 billion in 2021. That value is expected to increase significantly over the next decade, with some experts predicting that the RegTech market could be valued at approximately $19.5 billion by 2026.

So, what is driving this incredible growth, and what kind of opportunities does that present?

Some of the main drivers in the growth of the RegTech industry include a rise in fraudulent activities such as money laundering, an increase in cyberattacks, and more governmental regulations.

Because of this, the RegTech industry is abundant with opportunities for both solutions and services. Here are some areas in the RegTech industry that show some potential.

• Compliance risk management: Creating automated processes is nothing new for businesses, so why not automate processes for identifying, reviewing, and monitoring an organization’s compliance risks and creating controls and mechanisms to comply with changing regulations?
• Identity management: Ensuring access is limited to authorized users can be done in various ways, which is fundamental to identity management. For example, companies wanting to verify employees or guests at company events can generate and print bulk QR codes to properly manage and verify identities.
• Regulatory reporting: Creating processes to submit data to relevant authorities to demonstrate compliance.
• AML and fraud management: Monitoring all digital transactions, from mobile payments to creating automated invoices in real-time using AI and machine learning to identify and flag potential fraud or money laundering schemes.
• Regulatory intelligence: Gathering information on regulatory processes, requirements, and policies to analyze them and help companies better understand changing regulations to make informed decisions about their products and services.

All of these areas of opportunities in the RegTech industry have the potential to be more personalized, scalable, and efficient with the help of artificial intelligence and machine learning. In fact, using AI and automation is instrumental to the success of an industry that tackles something as data-heavy as fraud prevention and regulatory compliance.  

4 Tips for FinTech Companies Looking To Incorporate RegTech Solutions

FinTech companies looking to incorporate RegTech solutions to streamline their compliance processes face a big challenge. The RegTech industry is new and constantly evolving to implement new technologies and to keep pace with constantly changing regulations.

So, with so many RegTech companies regularly coming out, how do you know which ones would make a good partner for your FinTech company? Here are some tips for FinTech companies looking to work with RegTech to help with compliance.

1. Make Sure the Expertise of the RegTech Company Is Aligned With Your Business

Depending on what your company does, different areas of regulation will directly impact how your business operates. Do you work in lending? Crypto? Payment processing? You must ensure that the RegTech company you are working with possesses the expertise and experience for your specific FinTech niche.

Also, you may want to ensure they have a solid track record working with similar companies and regulators specific to your business model.

2. Innovation and Scalability

A RegTech company needs to be constantly evolving to keep pace with innovations and regulations changes in your industry. You should make sure that any RegTech company you are considering can offer cutting-edge technology and solutions that utilize AI, machine learning, cloud computing, blockchain, and any other technology that could directly streamline your specific regulatory requirements. Additionally, they should be able to adapt and scale to the size of your business with little to no effort.

3. Security and Compliance

Security and compliance are important for every business, especially RegTech companies. Ensure the RegTech company you are considering can protect your data and digital infrastructure from cyberattacks, data breaches, and fraud. They should use encryption, multi-factor authentication, firewalls, audits, and additional robust security measures to protect your business and customers. A quality RegTech company should also comply with all relevant data protection and privacy laws to ensure your data is stored and processed securely.  

4. Customization and Support

Any systems from a potential RegTech partner should be able to seamlessly integrate with your existing platforms, systems, and workflows. This may include connecting to APIs, internal and external data sources, and working with other third-party providers to ensure there are no disruptions. Also, if there are any issues, a quality RegTech company can provide ongoing support with a dedicated team that can fix any operational or technical issues or answers any questions you may have.