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The era of RegTech has just begun — regulatory compliance in the digital world

 

As we welcome 2021, we dive deeper into the world powered by technology, innovation, and regulations, where rules change every day, efficiency is the emperor, and possibilities are springing up like mushrooms. As global investment in fintech companies amounted to $135.7 billion in 2019, the list of strategic priorities for financial services organizations got longer. With great potential comes great responsibility, and 16% of financial services employees listed meeting regulatory and compliance specifications as their company’s strategic goal in 2020. With the ever-growing list of changing regulations, an increasing amount of data collected by companies, and a greater focus on data privacy, the lack of regulatory compliance has never been so costly. Companies pay thousands for mistakes that could have been avoided, had they closely followed legal changes. This is why Reg tech, or Regulatory Technology, is entering a promising time as we dive into the new year. How is 2021 shaping up to look for the RegTech industry? Let us explore Reg Tech trends through statistics, insights, and regulations! 

 

The price for innovation is greater responsibility: the importance of RegTech in the tech-powered era 

 

 

The pandemic has reshaped our world and accelerated the pace of digital transformation. Changes, which would normally take place over the next years, had to be made overnight to tackle challenges brought by the virus. It only fueled the FinTech revolution, which was already on its way before COVID-19 changed the way we worked, lived, and shopped. At the beginning of 2020, FinTech startups like Chime (USA), Revolut (UK), Klarna (Sweden), and Xinja (Australia) gathered millions of dollars in funding rounds and became the hottest market for investment. However, innovative and efficient FinTech solutions are often powered by one currency, which should never fall into the wrong hands: our personal information. With the rise of FinTech companies, the need to regulate the flow of information is driving the growing number of regulations, which is exactly why 62% of bank executives claim that regulatory compliance and cybersecurity challenges prevent them from embracing open banking solutions.  RegTech could be a solution as it allows for effective compliance monitoring, regulatory reporting, and detecting financial crimes. Reliance on technological solutions increased because of COVID-19 in 70% of companies, and even up to 81% in financial services institutions, as fintech solutions are used for payments, banking software, crypto assets, and insurance technology. It translates to an enormous need for RegTech, which often accompanies Fintech solutions. 

 

The state of RegTech in early 2021

What is the greatest value of Regtech? Many find RegTech to be crucial for operational management and strategic decision-making. What is important no Global Systemically Important Financial Institutions (G-SIFIs) used RegTech merely for risk and compliance function, compared to 19% of ‘regular’ companies. 16% of companies had already implemented RegTech solutions, and many more will do so in the upcoming years. The main reasons why companies are yet to deploy FinTech or RegTech solutions include a lack of investment/budget and in-house skills, data protection concerns, and poor IT infrastructure. According to early predictions, the global RegTech market is projected to go from 6.3 billion US dollars in 2020 to 16.0 billion US dollars by 2025. With Compound Annual Growth Rate  (CAGR) of 20.3%, RegTech’s future looks brighter than ever, especially thanks to the regulatory intelligence, which allows for identifying and interpreting regulatory changes to draw powerful insights and ensure legal compliance. The potential of digitalization is enormous, but so is the number of possible threats. From data security and privacy, fair sales practices, and financial exclusion of the vulnerable groups, the list of likely problem areas is long. Innovation is always accompanied by disruption, but it is the price to pay for greater efficiency, comfort, and speed of services. The fast growth of the RegTech industry is linked to technological innovation, which both creates new possibilities and evokes new fears, such as market surveillance and cybercrime related to data protection violations. Artificial intelligence and Machine learning are likely to completely reshape the way our world works, but there is a heated discussion about how it should be regulated to combine efficiency with justice. Machine learning is powerful, but if our data input contains any bias or error, algorithms will take it for absolute truth. For example, some ML companies collected most photo and audio data from white demographics, and as a result, facial recognition and automatic speech recognition tends to be less accurate for people of color, simply because algorithms did not learn to recognize them properly: the data input was not simply big enough. It is an example of racial bias, which, if left untouched, could impact the lives of millions of people. When in October 2020 the European Parliament discussed the future regulation of AI, they highlighted the importance of a strong legal framework, which would both support AI innovation and establish ethical standards and trust in new technology. The legal framework for AI would eliminate regulatory uncertainty, introduce safeguards against bias and discrimination, and ensure legal compliance, tackling such issues as intellectual property rights, transparency, and data security. This is exactly, where RegTech can shine: it can ease the workload connected to legal compliance, so companies can fully take advantage of upcoming innovation. Most companies hope that RegTech will enhance their strategic decision-making for the risk and compliance function, increase the accuracy of regulatory reporting, facilitate compliance function tasks (e.g. horizon scanning, training), create more insightful management information, and improve the line of sight to risk management processes. 

All things considered, in the world powered by technology, RegTech’s future seems to be secured. With innovation comes the need for compliance and regulation, and RegTech was designed to painlessly help businesses meet legal requirements and detect potential fraud before it is too late. With the rise of innovative RegTech companies, such as Switzerland’s very own Apiax, the transition into the digital era may be smoother than expected, both business-wise and regulation-wise. As companies look for diverse, yet cost-effective solutions to harness the potential of new technologies, Switzerland welcomes innovation with open arms, becoming one of the world’s top 10 RegTech markets, just after the UK, USA, and Luxembourg. Only time will tell what the future holds for RegTech, but one thing is sure: wherever the industry is going, it is forward. 

 

 

Sources:

  1. https://legal.thomsonreuters.com/en/insights/reports/fintech-regtech-compliance-report-2021
  2. https://fintech.global/regtech100/wp-content/uploads/2020/12/RegTech100-Summary-2021.pdf
  3. https://fintechnews.ch/fintech/swiss-fintech-awards-2021-is-now-open-for-applications/40504/
  4. https://www.sogeti.com/globalassets/common/reports/wftr_2019_ig_final.pdf
  5. https://fortunly.com/statistics/fintech-statistics/#gref
  6. https://regtech.org.au/resources/Documents/2019-ccaf-global-regtech-benchmarking-report.pdf
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