RegTech: Definition, Who Uses It and Why, and Example Companies

What Is RegTech?

Regtech is the management of regulatory processes within the financial industry through technology. The main functions of regtech include regulatory monitoring, reporting, and compliance.

Understanding RegTech

Regtech is a community of tech companies that solve challenges arising from a technology-driven economy through automation. The rise in digital products has increased data breaches, cyber hacks, money laundering, and other fraudulent activities.

With the use of big data and machine-learning technology, regtech reduces the risk to a company’s compliance department by offering data on money laundering activities conducted online—activities that a traditional compliance team may not be privy to due to the increase of underground marketplaces online.

Regtech tools seek to monitor transactions that take place online in real-time to identify issues or irregularities in the digital payment sphere. Any outlier is relayed to the financial institution to analyze and determine if fraudulent activity is taking place. Institutions that identify potential threats to financial security early on are able to minimize the risks and costs associated with lost funds and data breaches.

Regtech, or RegTech, consists of a group of companies that use cloud computing technology through software-as-a-service (SaaS) to help businesses comply with regulations efficiently and less expensively. Regtech is also known as regulatory technology.

Regtech companies collaborate with financial institutions and regulatory bodies, using cloud computing and big data to share information. Cloud computing is a low-cost technology wherein users can share data quickly and securely with other entities.

A bank that receives huge amounts of data may find it too complex, expensive, and time-consuming to comb through. A regtech firm can combine complex information from a bank with data from previous regulatory failures to predict potential risk areas that the bank should focus on. By creating the analytics tools needed for these banks to successfully comply with the regulatory body, the regtech firm saves the bank time and money. The bank also has an effective tool to comply with rules set out by financial authorities.

History of RegTech

Following the 2008 financial crisis ushered in an increase in financial sector regulation. There was also a rise in the disruptive use of technology within the financial sector. Technology breakthroughs led to an increase in the number of fintech companies that create technology-driven products to enhance the customer experience and engagement with financial institutions.

The reliance on consumer data to produce digital products has led to concerns among regulatory bodies calling for more laws on data privacy usage and distribution. The coupling of more regulatory measures and laws with a sector more reliant on technology brought about the need for regulatory technology.

As of mid-2018, deregulation in the United States—as seen in the unwinding of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) rules—has led to a slowdown in regtech company financing deals, though the compliance burden should still fuel the drive toward greater automation.

Characteristics of RegTech

Some of the important characteristics of regtech include agility, speed, integration, and analytics.

Regtech can quickly separate and organize cluttered and intertwined data sets through extract and transfer load technologies. Regtech can also be used to generate reports quickly. It can also be used for integration purposes to get solutions running in a short amount of time. Finally, regtech uses analytic tools to mine big data sets and use them for different purposes.

RegTech Applications

Regtech operates in various spheres of the financial and regulatory space. A number of projects that regtech automates include employee surveillance, compliance data management, fraud prevention, and audit trail capabilities.

A regtech business can’t just collaborate with any financial institution or regulatory authority as it may have different goals and strategies that differ from the other parties. For example, a regtech that seeks to identify credit card fraud in the digital payments ecosystem may not develop a relationship with an investment firm concerned with its employees’ activities online or the Securities and Exchange Commission (SEC) whose current issue may be an increase in insider trading activities.

RegTech Companies

Some example of notable regtech companies and the tools they have created include:

• IdentityMind Global: Provides anti-fraud and risk management services for digital transactions by tracking payment entities.
• Trunomi: Securely manages the consent to use customer personal data.
• Suade: Helps banks submit required regulatory reports without disruption to their architecture.
• Silverfinch: Connects asset managers and insurers through a fund data utility to meet Solvency II requirements.
• PassFort: Automates the collection and storage of customer due diligence data.
• Fund Recs: Oversees how data is managed and processed by the fund industry.