What’s in store for regtech in 2018? Where will the technology develop? Important technology in regtech for the financial services industry is identity verification by KYC, risk management and compliance. This article will examine the current trends in these industry segments to provide predictions for the future directions of regtech.

Know Your Customer (KYC) technology

KYC refers to the processes companies use to confirm customer identities, as well as government regulations requiring this. KYC helps meet Anti-money laundering (AML) and customer due diligence requirements. This is particularly important in financial industries, where fraud is prevalent and compliance reporting demands are high.

KYC seeks to prevent crimes, such as financial fraud, identity theft, money laundering and terrorism financing by requiring detailed information about counter parties in financial transactions. As such, KYC is an integral part of a bank’s risk management. In recent KYC news, BNP Paribas has partnered with Fenergo, a client lifecycle management (CLM) firm. Fenergo’s platform works to make companies compliant across multiple jurisdictions.

Regtech and KYC have the potential to greatly improve efficiency of multi-jurisdictional compliance. The MiFIDII and PSD2 are both European Union directives, meaning they require implementation by member states. Consequently, the regulation can vary slightly between countries. Intelligent and agile regtech is needed. Also, Brexit will make Britain a different regulation landscape to Europe. Being an important financial centre, smooth multi-jurisdictional compliance will be necessary.

KYC and blockchain

KYC has the potential for significant development from the incorporation of blockchain in 2018 as blockchain technology is more widely understood and adopted. Blockchain will boost security in KYC when dealing with identity and privacy law. The Amsterdam Innovation team of Dutch bank ING has been looking into the possibilities of blockchain for regulatory compliance in 2017. The project has 27 proofs of concept to experiment with blockchain for compliance and identity among other market sectors.

The State Bank of India (SBI) announced on November 1 that it plans to launch blockchain-enabled KYC with the help of Intel. Combining blockchain with KYC processes improves efficiency without compromising on data or transactional security. Consequently it is likely that blockchain will become widely adopted in the banking industry as it will reduces time and costs associated with customer on-boarding processes.

Holland FinTech member Tradle harmonizes the the anonymity of blockchain with KYC requirements with technology which resembles bitcoin’s public ledger. Tradle works with open banking principles: multiple banks can access their ledger which protects security with blockchain but makes KYC more efficient by centralising information.  

KYC: white label on boarding

White label on boarding is the use of a third party for KYC services. It is one solution for more efficient and cheaper on boarding which is becoming more popular. One company doing this is N26, german mobile bank.

In October, bitcoin intermediary Payment21 announced it had been licensed in Switzerland as a Directly Subordinated Financial Intermediary (DSFI). This means that the cryptocurrency third-party processor has been recognized as KYC compliant by the Swiss Financial Market Supervisory Authority (FINMA). This is the first official license of a Swiss bitcoin company, reported Payment 21 in a blog post. This is important to demonstrate that regulated financial intermediaries can offer anti money laundering (AML) compliant Bitcoin processing services. KYC compliance is just another way that cryptocurrencies could increase their legitimacy in the future.

The future of KYC

KYC will develop significantly when AI and intelligent robotics can get involved to improve technological solutions. In the fight against financial crime, involvement of AI and robotics is still in its infancy. AI has the potential to improve automation of alert investigations for compliance systems. Big data analytics will also have an increasing role to play in the future of KYC utilities due to the high volume of information being processed.

Risk management

Regtech systems in risk management support risk data aggregation for capital planning and liquidity reporting, modeling, scenario analysis and forecasting with stress testing. Important for the assessment of risk is big data analytics. A long term potential of regtech for risk management is predictive analytics. Predictive analytics can assess the root cause of a regulatory breach and use this to predict future risk areas or compliance issues. It is also useful in risk modelling. Improvements in this area of regtech rely on other technological developments from areas such as cloud computing and artificial intelligence.

Compliance

Regtech is valuable because it can help support compliance. Regtech systems monitor the current state of compliance against upcoming regulations, as well as real-time compliance. This is sometimes discussed as compliance intelligence, referring to the predictive aspect of regtech which allows companies to change processes in line with future regulation.

A trend in compliance is ‘compliance-by-design.’ Compliance by design is the incorporation of regulatory compliance within the processes and operations of a corporation. It recognises that there is an ongoing soft or human aspect to compliance: technology will never ensure complete compliance. This risk-based approach of ‘compliance by design’ identifies regulatory risk through data analytics and systemic issues in human processes. By taking a holistic approach to compliance, companies can better identify risk and the front office is more able to do their work. Holland FinTech Member Arthur’s Legal is a ‘tech-by-design’ law firm which helps clients work towards regulatory compliance among other aspects of legaltech; digital dispute resolution and digitally generated customised legal documents.

Another development in regtech is the concept of ‘Regulation as a Service,’ (RaaS). Suade is an important leader in Raas which encourages companies to see regtech as a way to improve working processes for efficiency as well as regulatory compliance. The company is UK-based and a member of the HollandFintech community. CEO Diana Paredes spoke recently at Sibos 2017 in Toronto about the importance of regulation and regtech to prevent future financial crises. She encourages companies to embrace regulation, instead of avoiding it and says that regtech is the way forward.

Potentials for regtech

Wide technological developments will improve regtech in the coming year. Cloud computing allow data to be stored easily. Artificial intelligence and data analytics make sense of this data. Using these technologies increases the capacity for regtech to remain agile and adapt to forever changing regulatory landscapes.

Long term potentials for regtech emerge mostly from combining current regtech with machine learning, behavioural analytics and the benefits of improving big data and artificial intelligence.The potentials here are significant but such initiatives are generally still in the proof of concept stage.

Shorter term opportunities for regtech development include further simplification of customer on-boarding from KYC and regulatory change management and risk modelling involving big data analytics.

By Grace Appleford, Research Analyst at HollandFintech