The word bank comes from the Old Italian word, banca, which means bench. A bench is what lenders in Florence and other wealthy towns in northern Italy used to sit on to do their business with clients. The first bank opened in 1472 bringing banking into conceptual reality. Much has changed over the last five hundred plus banking years and once technology was introduced to the equation, new milestone changes started and haven’t stopped since.
Financial Technology is sometimes condensed to – FinTech, the portmanteau of the words “Finance” and “Technology.” The FinTech world is increasing in scope and numbers daily, with many disrupting legacy businesses of established financial institutions. The creation of FinTech resulted from the national progression of the global economy combined with the economic meltdown of 2008.
The aforementioned credit crisis of 2008 in combination with the heavy impact of the resulting financial service regulations created a void in the banking arena. The void was ripe for innovative solutions, one of which was the development of RegTech. It should be noted in the financial sector, RegTech is considered a subarea of FinTech.
The four key phases of RegTech solutions are;
- Manual – This initial stage of RegTech manually collected and stored data.
- Workflow Automation – Occurred as financial service organizations began using software for regulatory reporting, automating audit trails and compliance tasks.
- Continuous Monitoring – Involves data analytics, process automation and back office integrations which need and utilize continuous monitoring to ascertain any inconsistencies and compliance gaps for security effectiveness.
- Predictive analytics – The future includes advanced analytics, cognitive computing, the cloud, artificial intelligence and machine learning among others. Because organizations are beginning to leverage artificial intelligence for risk and identity management as well as background screening, big data tools are being used to monitor efficiencies which reduces cost and offers foresight into emerging risk issues.
Many financial service companies are trying to impart informational narrative for others in RegTech requirements and have devised a system for consumable material which draws on four core characteristics.
- Agility – The cluttered and intertwined data sets de-coupled and organized through ETL (Extract, Transfer Load) technologies.
- Speed – Reports configured and generated quickly.
- Integration – Short timeframes to get a solution up and running.
- Analytics – Analytic tools to intelligently mine existing big data sets and unlock their true potential e.g. using the same data for multiple purposes.
Because there are so many changes coming fast and furious through the industry, a recent Deloitte report quoted biologist Edward Wilson “We are drowning in information, while starving for wisdom”.
What’s more, the changes keep coming. It has been stated the growth in RegTech and FinTech is now taking place almost concurrently because improvements in technology are so rapid the changes in regulatory and compliance are almost outdated before they are made.
Some of the changes have brought about new and various industries and technologies in RegTech and some are worth paying attention to:
- The many technologies which utilize cloud-based RegTech solutions provide flexibility and responsiveness, as well as data visualization in some industries, include blockchain which uses immutable ledgers of shared information. This will become the future in sharing and storing information.
- Predictive coding, open platforms in data sharing, data mining, and analytic tools are just a few of the real-time and systems embedded within compliance/risk evaluation tools. Tools which enhance operational effectiveness and are considered integral industry technologies.
- Solutions have had exemplary results in risk identification and management tools which include but are not limited to; legislation and regulation gap analysis, compliance, health checks, management disbursement of information and transaction reporting, case management and risk data warehouses.
The changes listed above need collaborators for the RegTech solutions to be successful in setting standards, breaking down regulations and inter-linking communication modules. Some are listed below:
- Open dialogue and gathering market views by regulators will help promote innovation and create common integrated standards.
- Start-up and revamped businesses will develop RegTech solutions to meet the needs of businesses and regulators.
- Responsibilities for cohesive regulatory standards, meeting institutional needs and vendor solutions will be designated to professional services firms who will help connect providers with users.
- Financial institution’s adoption and assimilation of the needed changes will grow RegTech solutions.
- RegTech adoption will provide risk management and compliance effectiveness while reducing cost while increasing operational efficiencies.
- The reduced cost will be the result of simplifying and standardizing compliance processes through automated mapping of regulatory risks, thereby reducing the need for manual and duplicate checks.
- Sustainable and scalable solutions utilized allow for flexibility and growth as business needs change. Ultimately, this helps enterprises move away from rigid risk management systems.
- Proactively identifying risks and issues by using scenario analytics and horizon scanning helps create new and applicable regulations.
- Controls and risk frameworks which are linked seamlessly allow for enterprise-wide governance and control platforms.
RegTech has no place to go but up as it continues to meet the demands in overseeing data and operational processes for security and fraud protection as regulatory and compliance issues are ever-changing.
As we stated previous, FinTech is considered the parent of RegTech. RegTech has been considered a subarea of FinTech since both exploded into the 21st century. It now reaches across a plethora of cross-sectional industries from retailers to banks to cryptocurrencies and more.
FinTech is considered a major disruptor in the financial sector and by that definition has given rise to a new way of thinking about financial market operations. Trading, banking, financial advisors and products are now moving towards mobile, fast-moving, ever-changing environments. Who are the users of FinTech today who utilize this nebulous industry? One may be surprised.
Approximately one-third of consumers worldwide are using two or more FinTech services, with an estimated 84 percent of consumers saying they are aware of FinTech. That’s a twenty-two percent increase from 2017. Within the consumer group that use FinTech, you have four sub-categories of:
- B2B for banks
- Business clients
- B2C for small businesses
- Consumer FinTech
Today’s investors are beginning to notice this rapidly growing and evolving market and in 2017, FinTech received $17.4 billion in investments. Investors in North America produced the most FinTech start-ups, but Asia’s production was right behind.
In the second quarter of 2018, funding for financial startups around the world scored $20 billion for companies seeking to disrupt established banking and payment systems.
Which begs the question, which innovations are disruptive, being utilized and funded in comprehensive platforms including payment apps and software applications like artificial intelligence and big data? They include, but are not limited to:
- Cryptocurrency and digital cash.
- Blockchain technology.
- Smart contracts – which often utilize blockchain to automatically execute contracts between buyers and sellers.
- Open banking – integrates third-party institutions and bank data with build applications that create a connected network of financial institutions.
- Insurtechs – aim to utilize technology to simplify and streamline the insurance industry.
- Robo-advisors which use algorithms to automate investment advice and increase accessibility while reducing costs.
- Unbanked/under-banked services which seek to serve disadvantaged/low-income demographics who do not traditionally have access to typical financial services companies.
Financially intelligent people know and use the best technologies available, so their financial transactions are as secure and seamless as possible. FinTech provides that and more. It was summed up by Bill Gates brilliantly when he stated, “We will always need banking, but will not always need banks.”
The future of banking and financial services will go to the early adopters who will set trends and gain insights that will ultimately lead them to having the competitive edge. Lead on.