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Is 2017 the year of regtechs?

- By Naveen PV and Varun Narang

Regulation was just a word before 2008, then it became 'the word' and for financial services -- the world. The subprime crisis of 2008 led to an over-regulated environment in financial services. The likes of Volcker, Dodd-Frank, and stress tests became buzz words, and millions of dollars were spent on ensuring compliance with the regulations.

Since the financial crisis, major US banks spent billions of dollars on compliance and added substantial strengths to their compliance departments. Financial institutions (FIs) began capturing, storing, and analyzing more data in-house, data reporting saw a substantial uptick, and new approaches to handle risk were introduced. 

At this juncture, the intervention of technology became really critical to handle the massive growth of reporting requirements. This subsequently led to the marriage of regulation and technology, leading to regtech (regulatory technology). Regtech came to the help of the financial services industry by automating compliance tasks and reducing the operational risks associated with meeting compliance requirements.

The effect of regtech on regulations is almost as extraordinary as fintech's impact on banks. It addresses risk and compliance obligations in a very cost-effective way by using algorithms and analytics to generate real-time information. Regtech also triggers innovation in the compliance space by identifying and adopting emerging technologies which have the potential to help firms manage regulatory compliance in an efficient way.

Few areas where regtech is affecting substantial change are anti-fraud measures, anti-money laundering (AML), Know Your Customer, regulatory reporting tools, compliance analytics, and such. For example, AML checks can now be streamlined using new approaches, social media and biometrics can be used effortlessly for customer due diligence, and producing a suspicious activity report can be a click away for banks.

Few interesting regtech companies are: Suade, a technology consultant for regulatory concerns; AlgoDynamix, a risk analytics company that detects disruptive events; Silverfinch, a data distribution hub that connects asset managers and insurers through a fund data utility; Corlytics, a provider of compliance risk analysis for financial institutions; Trulioo, an identity verification company; IdentityMind Global, an on-demand platform providing risk management and anti-fraud services; and such. A few governments are also making efforts to promote regtechs. Britain's Financial Conduct Authority provides clarifications on the compliance steps to follow and has also partnered with various FIs, academics, and accelerator platforms. Regtech companies are making complex work simple, making firms more flexible, and helping them reduce the regulatory costs.

2017 was tipped to be a great year for regtechs. However, the sector may face some issues due to the proposed policies of the new US president, which is targeted at de-regulation of the financial sector. The decrease in the number of regulations and their complexities would impact the prospects of regtechs, at least for some of the late entrants into the game. Regtechs have been focusing on digitization and automation of manual reporting and compliance processes during most of its existence. But looking at the imminent changes which may occur in the US regulatory world, to stay relevant, regtechs should broaden their scope of activities and move towards helping the financial services segment to monitor and enforce compliance with the regulations in near real-time. Nevertheless, regtechs will continue to have a profound influence on how banks and financial services firms comply with regulations in the future.

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