Amidst the pandemic, when fear is more contagious than anything else, and traditional solutions are failing, innovation is given a green light. With the world’s order turned upside down, society is embracing new possibilities with desperate enthusiasm and those who serve useful innovation on their menus may quickly build business empires. Numbers speak for themselves: the research conducted by deVere Group shows that the use of FinTech apps in Europe rose by 72% during the COVID-19. Life in lockdown requires a new set of rules and tools, and FinTech and RegTech are the first in line to help people adapt to the new reality. According to Statista, the global number of Fintech startups increased from 12,211 in 2019 to 20,925 in February 2020. FinTech grew in power everywhere, but Europe, the Middle East, and Africa saw the greatest increase in FinTech activity: their number of startups went from 3583 to 7385 in just a year. The rise of FinTech is interwoven with the emergence of RegTech, or ‘regulatory technology’, designed to address regulatory issues and solve them with the help of innovative technology. Why is RegTech so important? Standardizing regulatory processes and increasing their overall transparency saves businesses a lot of trouble, as regulations constantly change and are vital to companies’ survival. RegTech’s mission is to save both time and resources, maximally optimizing regulatory procedures in financial services. In the changing financial environment, where institutions are challenged to lower costs, and at the same time increase the quality of their services, RegTech could be the answer to the financial industry’s prayers. Government agencies are constantly modifying their regulations and every potential mistake in legal matters could cost a company a fortune in penalties, so RegTech, with its use of Artificial Intelligence (AI) and Big Data, is an efficient way to ease the legal workload and increase the accuracy of legal actions. How do AI and Big Data shape the nature of RegTech and what is their potential impact on the industry’s future?
First, while AI offers numerous possibilities to automate and optimize regulatory processes, the most popular uses of AI in RegTech include stress testing, automated monitoring of regulatory changes, and machine learning for Email Filtering. What is hidden behind each of these terms? Stress testing includes optimization of fraud-detection by decreasing the number of false-positive fraud warnings, while monitoring of regulatory changes helps to align internal policies with changing laws. Machine learning, on the other hand, is designed to analyze behavioral patterns to prevent data security breaches, especially in the form of unauthorized or misaddressed emails. Thanks to the General Data Protection Regulation (GDPR) and hefty fines for violating its rules, the importance of machine learning is only rising: 56% of RegTech companies already offered machine learning services in 2019, and 16% considered doing so in the near future. The industry's number one service is, however, cloud computing, already offered by 66% of all enterprises. In recent years, however, RegTech's area of expertise has been expanding, as new legislations have encouraged technological innovation by introducing stricter rules regarding legal compliance. The technology's potential is immense, but at the moment, most companies state that the primary selling points are increased effectiveness (84%), speed (64%), and cost savings (52%). Indeed, navigating the world of legal complexities is so time- and money-consuming that it remains one of the major business challenges. Companies report spending 4% of their revenue for regulatory compliance, and banks pay billions of dollars in fines for non-compliance with existing regulations. At the heart of the problem facing today’s companies is the enormous amounts of data those companies must process in order to comply with legal requirements, not only with the basic principles of GDPR but also issues related to trust in the AI should not be overseen. While AI can do much good, it can also do harm, for example, automated AML check can block justified transactions. Nevertheless, according to The Global RegTech Industry Benchmark report by the University of Cambridge, the global number of regulatory updates has skyrocketed throughout the years: from 8,700 in 2008, through 17,800 in 2012 to 56,300 in 2017. The use of data science, and especially machine learning, allows for the efficient analysis of data and enables the filling of gaps in data sets before they lead to financial losses. This is exactly why the Reg Tech industry's rise to prominence is inevitable: without technological support, legal compliance will require a tremendous and unsustainable amount of work and money.
Unsurprisingly, RegTech's projected annual growth rate from 2018 to 2023 is between 23% and 25%, which foreshadows its future dominance. Although, traditionally, RegTech is targeted at banks, within the last 2 years RegTech companies have begun to address the needs of the emerging FinTech market, which is currently gaining massive popularity on a global scale. Indeed, while regulatory technology is not exclusive to the financial world, it is the most popular in the places, where financial institutions thrive: mainly the USA, the UK, Luxembourg, Switzerland, Ireland, Australia, Singapore, and Japan. In Europe, alongside Luxembourg, Switzerland is the continent's leader in seeking innovation to optimize financial processes. Naturally, Switzerland’s dedication to improving financial systems is not surprising: the country was ranked number one in the Global Innovation Index 2019 and has been banks’ safe haven for decades. To stay at the top of the financial world, and lead the industry towards an innovative future, Switzerland has been investing in FinTech, and slowly warming up to RegTech. The Swiss created a welcoming startup ecosystem for creative entrepreneurs, and lowered taxes to attract innovative ideas from all around the world, securing for itself the title of a European innovation hub. Indeed, Switzerland is home to numerous startups, including several RegTech companies, such as NetGuardians specializing in AI Fraud protection, Apiax providing digital transaction tools, and Finform delivering compliance solutions. The power of technology in Switzerland’s financial sector is growing year by year. According to the Swiss Venture Capital Report 2020, 360.3 million Swiss Francs were invested in the FinTech sector in 2019, making it one of the country’s top sectors. Interestingly, although RegTech technology is definitely on Switzerland’s radar, banks are reluctant to openly embrace it. According to the Survey on Digitalisation and Fintech at Swiss Banks 2019, 42% of all banks find digital solutions more profitable than traditional solutions, 42% see no difference in profitability, and 17% find an implementation of digital solutions unprofitable. Yet, in general, the majority of banks see the regulatory system in Switzerland as sufficient and do not deem total digitalization of the sector as necessary, aside from establishing ‘a legal basis for digital identity’. Switzerland’s careful curiosity regarding RegTech mirrors global tendencies: although RegTech’s popularity is on the rise, only 14% of worldwide jurisdictions have already implemented RegTech solutions, while 27% are currently considering its use. RegTech’s revolution is still in the making, but its future is shaping up to be promising. In their report on AI in RegTech, Chartis Research reports that 70% of surveyed companies have already used AI in risk and compliance. Their reasons include meeting compliance requirements more easily (64%), reducing costs (56%), and achieving greater accuracy (44%). Respondents found AI most effective in fraud detection (62%), AML transactional analysis (57%), and alert triage (38%). Intriguingly, 62% viewed AI “as a viable alternative to established statistical models”, suggesting that AI may have a long career ahead of it in the financial sector.
All in all, as FinTech’s global dominance expands, so does RegTech’s influence and popularity. Equipped with AI’s deadly but safe accuracy and Big Data’s insights, RegTech could be the answer to the challenges related to the implementation of an ever-growing number of worldwide regulations which are still fragmented and still vary from country to country. Reducing costs, both in time and money, RegTech is an interesting alternative for financial institutions and businesses around the world, but whether it will build a strong position in the world of regulations, only time will tell.
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