You just got familiar with FinTech. Here is its evolution that has rocked the London 2016 FinTech Week edition: the RegTech (for ‘Regulatory technology’). The ambition: to manage all regulatory aspects, from the determination of ratios to the risk mapping and KYC management [1].

At the crossroads between regulation and technological innovation

The new players aim to address the following challenges:

  • Regulatory inflation: According to the European Commission, the state aids for the financial sector have reached 4,100 billion euros in the wake of the subprime crisis (see here). Following this ‘trauma’, the amount of regulations represented by acronyms ranging from 3 to 9 letters has increased significantly: FATCA, EMIR, FINREP, COREP, AEOI, ECKERT, ANACREDIT, etc. leading to an unprecedented regulatory challenge for financial institutions.
  • New entrants, new requirements: The new banks / payment institutions (Nickel Account, N26, Mondo, etc.) have a strong appetite for outsourcing. RegTech and FinTech have complementary business models allowing each actor to focus on its core activities. Thus FinTech may be tempted to get rid of constantly evolving compliance issues by outsourcing these activities to specialised operators.
  • Increasing the reporting pace: Deadlines for COREP and FINREP shortened from 2 months to 30 days with a frequency rise for other reporting (LCR’s monthly deadline for instance).
  • Consistency need: The need to ensure the consistency of all data submitted to regulators reinforces the position of RegTech. The objective is to avoid mistakes that could be penalized by the regulator. This challenge is acute for entities combining several segmented information systems and without a consolidated financial database.
  • Constant evolutions: Regulatory evolutions require frequent updates of the systems originally implemented. For instance, the European financial reporting (FINREP) has been updated several times, while other regulations requiring KYC approaches (anti-money laundering, FATCA, etc.) are increasingly demanding vis-à-vis data quality.

RegTech ambitions

  • Reactiveness: To respond to changes and developments within a short period of time, with the ability to quickly update the software according to new regulations at little cost.
  • Consistency: To centralize and reconcile accounting and management data to present consolidated information to regulators. In France, the regulator fined several insurers for non-complying with the Eckert law. To avoid these pitfalls, banks have decided to build up consolidated financial database in the last few years (i.e. ARPEGE, Crédit Agricole).
  • Flexibility: Customers want to pay for what they consume and have a monthly fixed amount enabling them to get additional offers depending on their needs (Market studies, product zooming etc.). This is SAB Services logic (Saas[2] and BPO[3]).
  • Added-value: This may be the most innovative aspect of these new firms. They do not plan to confine their activity to reporting issues but aim to enter the most innovative aspects of information management from top to bottom (such as Big Data, Artificial Intelligence, etc.).

Beyond the regulatory!

The centralization of banking data (accounting and management) should enable RegTech to invest in ‘big data’. The goal is to provide targeted information to improve decision-making by adding the compliance perspective (credits provision, equity ratio, etc.) to each step of the operational processes (credit instruction etc.).

In a near future, we can assume that every decision made by an employee would be taken according to the group’s interest at this specific time.

Furthermore, the emergence of artificial intelligence is at the heart of the upcoming changes. Concrete uses concern the processing of databases set up to meet the regulators’ requests (FATCA, AEOI OECD etc.). To provide automated and intelligent screening of these bases would permit to quickly target clients or counterparts likely to be involved in international scandals to anticipate risks and canalise them upstream. In practice, customised and targeted alerts like Reuters would ease and fasten this decision-making process.

In short, RegTech seem to offer new and reactive solutions that will surely cause challenges in terms of interfacing, confidentiality and data management (cloud). Nonetheless, several interrogations remain: first, to what extent RegTech’s added-value will constitute a game changer to the current situation. Second, how these new players would react in case of a ‘regulatory deflation’ and how sustainable is their business model.

Anyhow, current regulatory environment and technological evolutions constitute strong incentives for new players to emerge and respond to the twofold issue faced by bankers: to reduce costs and to control risks in real time.

To go further :

[1] Know Your Customer
Software as a Service (Saas)
[3] Business Process Outsourcing (BPO)