Financial institutions have faced an ever-increasing regulatory burden over the past 10 years. The cost of compliance has surged, particularly for global companies operating across multiple jurisdictions.
- RegTech is one of the fastest growing elements of financial innovation. RegTech uses technologies such as advanced analytics, robotic process automation, cognitive computing and the cloud to achieve regulatory and compliance outcomes more efficiently and effectively.
- Shareholders want management to show they can meet regulatory demands without throwing more resources at the problem.
- The wider market is challenging. Margins are slim, competition is intense and political uncertainty is feeding economic and financial market volatility.
- Financial institutions are turning to RegTech to fill compliance gaps, reduce costs, and get ahead of requirements and detect risk before the regulators do.
- The industry is spending big on digital transformation, especially in delivery platforms. Compliance monitoring tools need to adjust to this new environment.
- It is easy to get carried away with new technologies that ultimately do not deliver. Most financial companies’ use of RegTech is in its infancy and obstacles lie in the way.
- RegTech has the potential to improve service and protection for customers and to help restore trust in the industry.
- Regulators in Africa should be receptive to innovation and willing to support experimentation within common sense parameters.
Investing in RegTechs
When it comes to investing in RegTech, we have observed three key drivers among financial institutions: Compliance, Cost and Complexity. The dominant driver will shape the ambition of the organisation in its adoption of RegTech.
Typically, companies start their journey concentrating purely on meeting regulatory obligations. If they choose to deploy RegTech for those purposes only, they are Defensive users of RegTech. Progressive companies aim to reduce costs and improve customer experience for both internal and external users. In the final level of sophistication, companies become fully adept at reinvention and use their solutions to interrogate and navigate a dynamic environment. Successful companies will deploy all three strategies in a deliberate and coherent fashion.
Political events are creating global uncertainties as the financial sector seeks to navigate new products, services and regulations. Added to these factors is the complexity created by the data environment, legacy systems and operating models.
Regulatory constraints and pressure on margins have made it harder for financial institutions to generate consistent profit growth. Financial institutions’ need to reduce cost will see them embrace technology which enables them to increase efficiency and productivity in the risk and compliance function.
Regulatory expectation continues to grow as regulators focus on reforms in supervision and managing systemic risk such as data and consumer protection.
- Reinvention requires the company to become a data-driven IP organisation. System infrastructure will be challenged to produce data that can form the basis of enhanced compliance, cost reduction and consumer benefit. The company has its own innovation and commercial culture embedded.
- Progressive companies have moved on to augmenting meeting compliance requirements with customer-driven process efficiencies, thereby improving customer experience.
- Defensive companies are concerned mainly with meeting regulatory requirements. Measures of success include keeping up with regulatory change, while maintaining a flat cost line and adopting a ‘wait-and-see’ approach to innovation.
Regulators in Africa and worldwide are exploring how they can apply technology to their own processes, as well as how technology can increase efficiency and relieve the burden on firms. Many have sought the views of firms and hold events to explore potential innovations. In the future, companies should expect mandatory requirements for technology that lets regulators scrutinise their data more effectively.
We expect that regulators will also become major users and beneficiaries of RegTech as they embrace new technologies to meet their supervisory challenges. RegTech deployed by the regulators – also known as ‘SupTech’ – should enable them to take data-driven and forward-looking approaches to supervision.
Emerging technology will continue playing a major role in shaping the world
The pace of technological development will continue to create possibilities, which in turn will become minimum standards of performance. The organisations that are able to dynamically innovate in collaboration with next-generation technology providers will thrive. Those that are unable to will most likely cease to exist. In this environment, the ability to scan and successfully screen the RegTech landscape for effective collaborators with successful solutions is already a core capability.