In this report, the authors evaluate the potential of regtech in reinventing how institutions manage regulatory compliance.
Regulation is one of a number of services to receive the “tech” treatment in recent times, although like Fintech, there is still no standard definition of what it actually constitutes. Although the term is new, the concept that lies behind it is not — using tech to solve regulatory challenges has existed for quite some time, and with varying degrees of success.
Alan Meaney (CEO of FundRecs) describes regtech as “another example of an industry that is being changed rapidly by software” and attributes the emergence of the buzzword to an inflection point where “the gap between software and non-software enabled services has widened significantly.” Major changes in the regulatory environment have brought regtech offerings into greater focus, thereby creating more value for the firms that invest in these solutions.
According to the authors, the key characteristics of regtech are:
- Agility – cluttered and intertwined data sets can be de-coupled and organised through ETL (Extract, Transfer Load) technologies
- Speed – Reports can be configured and generated quickly
- Integration – short timeframes to get solution up and running
- Analytics – The use of analytic tools to intelligently mine existing “big data” data sets and unlock their true potential e.g. using the same data for multiple purposes.
The old vs. the new
One of the purest forms of regtech involves automating reports, which are still heavily steeped in spreadsheet formats based off of archaic legacy systems that have not evolved in tandem with increasingly modern hardware. Regtech solutions do not endeavor to change the legacy system, but introduce new capabilities designed to leverage on it. Consequently, regulatory reporting can be done in a more effective, pliable and timelier manner without compromising on accuracy or data integrity.
What sets regtech apart from traditional solutions are the advantages of agility and data pliability that comes with being cloud-based. Being situated on the cloud also renders clients four distinct advantages, namely:
- Fee-for-service options that allow users to pay for what they use
- Flexible data sharing and authorization options
- Increased control customisability and scalability of solutions through easy adding and removal of product features
- Increased data security through immediate encryption.
In the context of increasingly volatile regulatory ecosystems, the report contends that regtech solutions are preferable over pricey, slow and cumbersome models from brand-name vendors that require equally slow and bulky add-ons to cope with regulatory changes. To further substantiate their point, the authors cite several star performers including Hadoop, Tableau, Pentaho and Silverfinch as examples of companies whose products have successfully capitalized on the software fatigue that the entire regtech industry is incidentally built on.
Not all that glitters is gold
According to the report, the regtech industry is not exempt from the rampant ageism that plagues the financial services sector, where bankers still gauge the credibility of their opponents and collaborators by the virtue of their seniority. This is reflected in the composition of regtech executive teams — leaders are most likely seasoned, experienced financiers, even though the very mention of fintech usually evokes images of tech-savvy millennials and co-working spaces.
Regtech companies also fall flat on the marketing front as they still lack the crucial market insights of experienced software vendors that is needed to navigate the nuances of regulatory behemoths. Regtech companies need to position themselves as targeted solution providers with expert knowledge of a specific problem that they intend to solve. Correspondingly, regulators need to be tech-savvy enough to fully capitalize on the information that the industry has to offer.
As promising as regtech appears from the outset, the report ends by cautiously reminding its readers that it is not a panacea for all compliance related challenges due to the innate subjectivity associated with the job. The report contends that despite unparalleled advances in data analytics in recent memory, regtech will shine most in compliance areas that deal with heavily quant based obligations, information based obligations, and risk identification and management. In these contexts, regtech can help firms automate mundane tasks while simultaneously lowering risks associated with meeting compliance and reporting obligations.
Deloitte’s full regtech report can be accessed here.
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