Regtech has for long been an underdog subcluster of Fintech. Over the last year or so, the trend has been changing, and more stakeholders in the ecosystem are taking notice of how fundamentally important Regtech is to the industry. Over the last few weeks, Regtech has been in the press for all the right reasons. The International Regtech Association (IRTA) was launched with a mission to create an ecosystem for Regtech firms to thrive. IBM have announced the launch of Watson’s RegTech capabilities, thanks to its acquisition of the Promontory Financial Group (PFG) last year.
The top banks have been spending close to about $1 Billion per year on regulatory processes and controls. Regtech firms are focusing on bringing cutting edge technology like AI and Cloud computing and add efficiencies to achieving regulatory compliance. The FCA has been a pioneer in embracing innovation through the FCA regulatory sandbox, that allowed RegTech firms to test their value proposition without fear of a regulatory breach.
The IRTA, a non-profit, was launched recently, with a goal to bring together technology firms, banks, regulators and academicians in developing international Regtech standards, and promoting research activities.
For Fintech firms to scale globally they need a consistent approach to regulation across nations. For instance, Fintech firms in Asia have serious challenges when navigating through different regulatory regimes while looking to expand beyond their home territory. For example, Cryptocurrency exchanges are treated as money changers and regulated by the customs authority in Hong Kong but they are licensed as online shopping malls in South Korea. In Singapore, the central bank has proposed regulating bitcoin exchanges as payment firms.
Every time they want to expand into a new country, Fintechs are having to start from scratch due to incompatible, and often conflicting regulatory approaches. This not only adds operational delays, but also sometimes needs business model tweaks. In my article last week, I discussed about similar challenges that US Fintechs have in expanding across different states.
The IRTA should help resolve these inconsistencies, over a period of time. It is chaired by Subas Roy who was most recently the Global Head of RegTech at EY. His vision for the IRTA is to set global Regtech standards, lead research and help Regtech firms develop solutions that can be used by banks for regulatory compliance.
The IRTA currently has about 250 members. They hope to work with the global Regtech market that has close to about 700 companies, while about five global banks are keen to join the initiative. This is a great start, however I believe it is essential for the IRTA to work closely with regulators, especially the FCA and the MAS, as they have created a good framework to groom innovation that other regulators could follow.
Earlier this week, IBM Watson announced the launch of its new anti-money laundering (AML) and know-your-customer (KYC) capability. This includes Financial Crimes Insight with Watson, which applies cognitive computing, intelligent robotic process automation, identity resolution, network analysis, machine learning, and other advanced analytics capabilities to help banks spot financial crime.
At the end of last year, IBM acquired Promontory Financial Group (PFG), a consultancy firm specialising in financial regulations. PFG have been training IBM Watson on regulatory compliance.
The aim of the new financial crime solution is to reduce the amount of false positives generated by today’s transaction monitoring systems. Banks have a false positive rate of 98% and spend about £2.7 Billion per year in chasing false leads. About 55% of these costs could be saved by Regtech solutions using AI, as per IBM. This would make the transaction monitoring process very efficient.
Its good to see that government agencies (FCA, MAS), non-profits (IRTA) and Technology firms are waking up to the fact that Regtech is no longer the underdog. Its a massively untapped market that might have just reached the tipping point and 2018 could be the year of Regtech.
Arunkumar Krishnakumar is a Fintech thought-leader and an investor.
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