Regtech: Transforming the Financial Services Space

April 2021

Fintech & Payments

Nick Maynard

VP of Research

Over the past few years, the concept of Regtech has taken on much importance within the financial services ecosystem and beyond. During the COVID-19 pandemic, regulatory compliance has become more complicated, meaning Regtech is a highly dynamic and rapidly evolving area.

However, we believe that Regtech will also become important in areas other than financial services, as highly regulated verticals seek to ease their compliance burdens.

The current regulatory landscape in financial services is still largely what was put into place following the 2008 financial crisis. However, these regulations are constantly being amended and revised to reflect social, cultural, political and technological changes in the regulatory environment. In the US, for example, the Trump Administration reduced the scope of many of the banking regulations in the US, such as Dodd-Frank. Despite changes and, in some cases, simplifications, it is clear that the regulatory burden is not loosening on banks and other FIs. The stakes are also very high, with fines proving very costly to the industry. 

With an average of 10%–15% of staff dedicated to compliance, as of 2020, banks globally are spending in excess of $287 billion per year on compliance and regulatory obligations, with no anticipated relaxation of regulatory rigour anticipated in the near future. For highly regulated businesses, regulatory compliance is not optional; having the most effective regulatory compliance strategy is a basic requirement. What businesses must decide is the most effective way to complete these requirements, which is increasingly becoming an argument of which technological solutions to deploy. 

Over the past five years, the banking and financial services spaces have embarked on a long journey of digital transformation. This has seen the rise of digital-only services, such as neobanks, as well as any number of online financial services providers, financial apps and other regulated activities that require KYC (including gambling, cryptocurrency exchanges and some elements of eCommerce). This transformation has had serious implications for the onboarding process. By moving to a digital-only proposition, the onboarding and KYC checks also have to be fully digital, which represents a change in how many of these processes were traditionally carried out.

It is unquestionable that the pandemic has had a major accelerative effect on the digital onboarding market. The various lockdowns and restrictions in force throughout the world have had a strong impact; accelerating existing trends towards digitisation. For banks and other FIs, this means digital onboarding and verification will have gone to the top of the agenda. This is for the simple reason of business continuation, digital onboarding a key capability that needed to be offered. However, this change now looks to be a permanent one, with users and businesses now seeking digital onboarding as an alternative to traditional processes in the long term.

In all this, AI is increasingly central to the digital onboarding process – whether this is in automatically verifying identities using selfie onboarding or building and checking identities against KYC data. For this reason, Regtech vendors must make AI a core part of their solutions, whilst still leveraging human intelligence to keep their decisions fully explainable. AI’s capabilities in automating manual tasks will allow businesses to begin to improve their levels of spending on regulatory compliance.