The cost of governance, risk and compliance is estimated at 15% of the total cost of running a financial services firm. Regulatory technology can help.
“Regtech is about the intelligent use of technology to get better outcomes for clients. It’s also about stopping regulations getting in the way of the user experience,” said John Byrne, CEO of regulatory risk intelligence firm Corlytics.
He was participating in a panel discussion on regtech, as part of The Future of Fintech, an event organised by Enterprise Ireland in Dogpatch Labs in January.
Keeping financial services regulators happy
“Regtech is where financial services companies meet the laws that govern them and the regulators that oversee them. Part of keeping regulators happy is ensuring they understand what you are doing,” said Lisa Ezrol Curran, Founder of FinTex Chicago.
“When regulating innovative fintechs, a key part is to provide resources for the regulators themselves, so that they have trusted advisors they can turn to.”
For Guenther Dobrauz, who leads PWC Legal in Switzerland, regtech is a natural evolution of fintech.
“When fintech first emerged, it was perceived negatively, as a competitor, by the banks. But at the same time they were being hit by a regulatory tsunami in the wake of the financial crisis,” he said, referring to measures ranging from Dodd Frank to MiFiD and GDPR.
Not alone did banks realise they simply couldn’t handle all this internally, they began to see there was no financial value to be derived from trying. “They realised they were not losing out by allowing regtech companies in”, said Dobrauz.
The regulatory tsunami is still coming. “GDPR will be twice as big as MiFiD. Right to be forgotten? Sure but first I need to know where it is!” he said. The result is that “regtech firms are being actively invited in by banks, as opposed to fintech, which they are trying to keep away,” he said.
Global regtech drivers
Global trade is driving demand for regtech too. “For legacy banks, the tightening of regulation is not limited to geographic boundaries. We didn’t have a financial crisis in South Africa but we are subject to global regulations that are expensive for a relatively small banking system, for example,” said Cas Coovadia, managing director of the Banking Association of South Africa.
He believes regtech addresses the need bankers have “to find a balance between the trust and stability of traditional banks, and the services of fintech”.
Banks in South Africa are amenable to regtech but challenges remain not just in relation to legacy systems but “legacy mindsets” among regulators who often still insist on paper trails, he said.
The good news is that regulators are not in the business of fining people so much as of finding better outcomes, said John Byrne of Corlytics, who contrasts the on-boarding customer experience offered by digital firms with that of banks.
“If you look at eBay and other digital firms, they have a huge sense of what is reasonable,” said Byrne. “If banks were in the digital space they’d have a different view of what is reasonable, in terms of how you trust customers.” That would result in an on-boarding process that takes 6 hours, not 42 days, he said.
Change is coming however. Banks are already using biometrics and artificial intelligence to meet ongoing customer due diligence needs, said Peter Oakes, founder of Fintech Ireland.
Good regtech suppliers deliver competitive advantage
And a good regtech supplier is increasingly seen as a source of competitive advantage. “It is easier for financial services institutions to say ‘We can enter into things like digital currencies because we have a good regtech provider who will keep us compliant’, helping with the adoption of new technology,” said Ezrol Curran.
And the bottom line is that, once a financial services entity embraces a new technology, the regulator must too. Indeed, with innovations such as M-Pesa, the hugely successful mobile money solution in Kenya, the regulator there allowed the innovation to move ahead of it.
By contrast, M-Pesa was tried in South Africa and it failed, said Cas Coovadia: “That demonstrated the difference in approach. In Kenya they watched it and because they saw the impact it could have for financial inclusion, it was let be. In South Africa, it was killed by heavy regulation. Sometimes what is required is bravery – not too common among regulators – and a will to move with the times.”
To be fair to regulators, their role is to enforce the law, not create it, said Guenther Dobrauz, positing principles-based regulation as part of Switzerland’s appeal as a base for financial services start ups. “It’s not about creating a total sandbox where everybody can do anything. It’s about having minimum rules.”
Advice for growing regtechs
For regtechs looking to grow, engaging with regulators is a must, but can also offer advantages, pointed out John Byrne of Corlytics: “Most of the US federal regulators are in the market for regtech and it takes one third of the time to close a deal with them than it does with a bank.”
Geraldine Gibson, founder of risk insight and compliance automation company AQmetrics, feels similarly. “When I started AQMetrics, the regulators didn’t have time to talk to us, they were so awash with all the learning up they had to do. But once they got on top of that learning, they started coming to us. They now see the value of regtech and are much more open to speaking to regtech solutions providers,” she said.