What Is RegTech? How Emerging Technologies Are Transforming Finance

Emerging technologies have transformed the customer experience that banks, credit unions and other financial institutions deliver. They've also changed how these companies manage compliance and regulatory obligations.

Regulatory technology, or RegTech, offers solutions to help the highly regulated financial industry address a range of legal and compliance requirements. RegTech may look like another complicated layer of technology services, but its benefits will likely transform finance for the better.

What is RegTech?

Financial companies are subject to a variety of compliance mandates regarding how they collect, store and transmit customer and operational data. They also must meet rigorous reporting requirements from federal and state governments and various accrediting and regulatory bodies.

RegTech has become increasingly important in an age when financial institutions face a rise in cybersecurity risks and a constantly evolving regulatory environment. According to a 2018 Thomson Reuters Compliance Report, a new regulatory alert is issued every seven minutes (PDF). In this type of environment, organizations must be more nimble and responsive to regulatory changes in order to reduce their risks.

RegTech involves using emerging technologies such as the cloud, artificial intelligence, or AI, machine learning, natural language processing and other advanced tools. These solutions help automate threat detection and response, compliance and reporting, and many parts of an organization's back-end operations. They also allow financial institutions to gain more visibility into their operations so they can more effectively address their regulatory and financial risks.

The diverse RegTech landscape

The RegTech landscape includes a range of software-as-a-service, or SaaS, solutions that generally fall into the areas of monitoring, managing regulatory and compliance requirements and streamlining compliance management. With these solutions, organizations typically don't need to completely overhaul or replace their existing hardware systems. Instead, financial institutions can use software to extend their capabilities and access real-time analytics and business insights. This allows them to be more proactive, rather than reactive, when it comes to compliance management.

But what do these solutions look like in the real world? Some examples of RegTech include anti-fraud and money laundering applications that help financial institutions pinpoint suspicious activity and other anomalies in an automated way—instead of relying on the manual, siloed processes they've traditionally used. These solutions help financial institutions monitor transactions and identify whether a hacker is fraudulently using a customer's credit card or unlawfully accessing their bank account. This can help companies prevent fraud before it happens, minimize the impact of these events and better protect customers.

Customer lifecycle management, data privacy and regulation-as-a-service, or RaaS, platforms are three other examples of RegTech. Customer lifecycle management platforms allow financial institutions to securely collect and store customer data and reduce the security risks associated with customer onboarding and offboarding processes. Data privacy platforms allow financial institutions to manage the consent process for customer data and improve compliance with privacy regulations, such as the General Data Protection Regulation. RaaS platforms allow these organizations to more efficiently process large volumes of data to meet various reporting requirements.

Together, these diverse solutions are helping financial institutions combat sophisticated security threats and better manage their risks—all while delivering a better banking experience.

Improving banking and protecting customers

Technology has disrupted the financial industry. As companies focus on delivering the best digital experience to customers, they also need to enact stronger risk management. Regulatory technologies help them balance these two goals. RegTech is still growing and new applications will continue to emerge—from solutions that create AI-driven, automated reports to those that address cross-border risk management across global financial markets.

So, what is RegTech? It's an opportunity to help organizations bring more efficiency to their operations and avoid costly fines and potential data breaches that affect their performance and reputation in the marketplace. These tools provide modern capabilities that will be indispensable for financial institutions that want to remain competitive without increasing their business and financial risks.