May 30, 2017  By : Nidhi Prabhu
The onset of the global financial crisis (GFC) had many far-reaching consequences for the financial sector. Not only did it open the regulators’ eyes to the fallibility of the big players, it also revealed the ability of these entities to bring the entire financial, and economic sector down. This led to a heightened sense of awareness regarding the need for tighter financial sector regulations.
Since then, there has been a steady increase in regulations around the world (as opposed to the ebb and flow witnessed earlier). An average of 200 new regulations is being brought in daily, which is three times the number from the year 2011, and five times from 2008. Financial sector entities operating in multiple geographies are having a really tough time, as regulations move from being the globally coordinated initiatives they used to be, to individual jurisdiction-based decisions.
Ensuring compliance with these evolving, ever-increasing regulations has been taking a toll on the regulatees – in terms of time, cost and resources deployed. According to a Deloitte report, almost 15% of the sector’s workforce is deployed in governance, risk management, and compliance functions. Despite this, things have been falling between the cracks. BCG says that $321bn has been paid by US banks as fines since 2009. The lLarge US and EU-based universal banks have witnessed a 45-fold increase in fines between 2010 and 2014.
Regulations have now started having an impact on the strategic and operational decisions being taken by banks, as they were meant to. Due to higher capital requirements for certain activities, banks have shifted their focus to other products and activities with lower capital requirements. They need to price in the higher risks in some products, and their hedging strategies are getting affected. There is thus, a huge cost resulting from these regulations, both in direct terms and in terms of a shift in business.
How the Technology Contributes
On the positive side, there has been a tremendous improvement in the technology available to help banks address their compliance and other concerns. Technologies that earlier appeared to be prohibitively costly, now appear to be priced attractively, when you compare them to these direct and indirect costs.
RegTech is the confluence of financial business, regulatory compliance requirements, and available technology. There are many areas in which RegTech offers a time and cost effective solution through the cloud, or through on-premise products. Data management through data mining and big data analytics for the purpose of regulatory reporting, risk management, fraud prevention and reduction are the simplest of them. Process automation uses data analytics and machine learning to link compliance points to key business areas, flagging the risks in a timely fashion, thus reducing the need for real-time manual checks and interventions. Identity management and control combine e-KYC processes with big data analytics and machine learning to ensure AML compliance. These tools, along with visualization techniques, are proving to be a tremendous help in the area of cybersecurity and fraud prevention by way of real-time and short-lag monitoring. These capabilities far outweigh human capabilities in terms of speed and the number of transactions that can be monitored, many-a-times resulting in the recovery of large sums of money that would have otherwise been lost. Strengthening of cyber-security by the use of cloud hosting services has taken on increased significance in these times. Visualization solutions are very effective in the area of governance, by helping highlight the relevant trends and items of significance. API, blockchain solutions, smart contracts are being used by both established players and challenger startups. Even AI’s use is being explored, though it is still in the nascent stages.
The benefits of using technology to automate processes and systems are multi-layered. Time and cost savings, timely interventions in the context of frauds, satisfactory compliance leading to the lack of regulatory action are only a few of them. As automation takes over the time-consuming, complex activities, the human resources are freed up for being engaged in more productive ones. The top management and board gets to rely increasingly on well-presented information and are able to devote more of their time on strategic decision-making.
As providers develop reliable products based on AI, other areas like the prediction of regulations start coming into the realm of possibility. These forward-looking approaches would help organizations with better resource management and capital planning.
RegTech is witnessing interest from both startups and established players. With capabilities like Cortana and Watson being developed by Microsoft and IBM with their immense resources, questions are being raised whether startups can survive the long-gestation periods and capital intensive nature of this industry. We at LTP believe that there is scope and space for everyone. Some bright ideas need more than capital to be taken to fruition, and some of the startups have just the right frame of mind to be there. Let the best technology win!
Nidhi is especially interested in super-fast payment systems, and loves to bring in a customer’s perspective to all initiatives. She is passionate about revolutionary (and the ‘not-so-revolutionary’) applications of FinTech in the BFSI space.