Regulatory technology (a.k.a. regtech) is an up-and-coming industry that utilizes modern technology to handle administrative regulatory necessities. It is regarded as a fintech subset (fintech is defined as technology that optimizes the efficiency of financial activities). Celent’s senior research analyst, John Dwyer, said the following about the emergence of regtech during a Q&A session with SimCorp Journal: “By harnessing technology to improve and optimize a financial institution’s ability to comply with its regulatory requirements and automate the regulatory compliance process as much as possible, regtech has the potential to bring huge benefits and cost savings to the investment management industry,”
What Is Stimulating the Growth of Regtech?
The integration of technology and regulation is nothing new. However, the field of financial services – among other industries – are under immense pressure to come up with innovative ways of conducting business, particularly for management of regulatory data (as well as the reports that go with them). A number of factors influencing this pressure include the
Regulation Proliferation: within the American financial sector, regulatory bodies are comprised of the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Commodity Futures Trading Commission, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board. There are also insurance, security, and bank bodies that are state-specific to consider. Every entity has their own series of purviews and requirements that allow them to operate independently of each other, despite the fact that they might be working on achieving similar goals.
Rising Compliance Costs: to no one’s surprise, maintaining these compliance requirements can be a challenge because they are always evolving. To fulfill them, businesses must rely on skilled personnel for compliance management. They must keep operational processes updated in order to remain in compliance with the requirements expected of them. Companies must utilize modern technology to stay on top of requirements for reporting and data changes. Compliance expenses have become onerous enough that the average cost of on boarding a new client is about $6000, based on the client’s risk-rating, as well as the nation’s regulations. Here is what the Mercatus Center of George Mason University had to say in the matter: “On a macroeconomic scale, the buildup of regulation has slowed economic growth by an average of 2 percentage points, according to a study published in the Journal of Economic Growth.”
Avoiding Regulatory Fines: during the fall of 2019, FINRA (The Financial Industry Regulatory Authority) issued a $15 million fine to BNP Paribas for their failure to create an EDD (Enhanced Due Diligence) program capable of detecting suspicious wire transfer and penny stock activity. A year earlier, that same authority issued a $10 million fine to Morgan Stanley because their AML program did not meet the Bank Secrecy Act’s requirements. These are just two cases. Approximately $26 billion worth of fines were imposed on many companies for failing to comply with KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations over the last ten years, according to Fenergo’s research.
Regtech Provides Modern-Day Solutions
In order to manage increasing compliance costs, many regtech solutions have made their way into the market. Such technologies handle various kinds of regulatory requirements. They are capable of optimizing the efficiency of certain compliances. For instance, software programs that are cloud-based have been developed that automate a number of compliance aspects. Some solutions track financial transactions. Computer programs, for instance, have been developed that analyze blockchain transactions in real-time, as well as the customers conducting those transactions. Some regtech firms have concentrated on regulatory reporting (for example, platforms capable of extracting data from financial documentation that has been scanned); as well as risk management (for example, tools for risk analytics capable of detecting disruptive events within international financial markets, as well as predict price movements). Other solutions concentrate on managing and controlling digital identities – an important element of AML and KYC compliance. For instance, Jumio collaborates with members of the financial field to integrate biometrics that are face-based, ID verification, and AI to make sure a customer’s digital identity is in sync with their actual real-world identity.
When Identity Verification Intersects with Regtech
Besides the aforementioned regulatory agencies, the financial field must also be in compliance with mandates when it comes to verification of customer identities. For instance, KYC policies require companies to demonstrate “reasonable due diligence” when confirming details about each customer. Are these people truly who they claim to be?
Several Compliance Mandates Relevant to Identification Management and Verification
- CDD (Customer Due Diligence)
- KYC (Know Your Customer)
- AML (Anti-Money Laundering)
- 5AMDL (5th EU Anti-Money Laundering Directive)
- COPPA (Children’s Online Privacy Protection Rule)
- CCPA (California Consumer Privacy Act)
- ICO (Initial Coin Offerings)
- PCI (Payment Card Industry)
- HIPAA (Health Insurance Portability and Accountability Act)
The outdated model of getting customers to validate something they have, know, or are can’t be relied on any longer. They aren’t reliable enough to confirm the online identity of the customer based on that same person’s identity in the real world. Things you are familiar with – such as security questions and passwords – can easily be gleaned from social engineering, the internet, or the dark web. Things you own, like a SIM card or cell phone, are just as problematic.More modern enterprises than ever - financial institutions included - are using biometrics to verify and authenticate identities. These organizations are using biometrics in conjunction with more conventional ID verification methods to enhance protection against internet fraud, maintain KYC and AML compliance, and establish trust in ecosystems online.
Regtech that concentrates on verification of identities online involves connecting someone’s digital identity with their authenticated ID (issued by the government) and having it corroborated with biometrics (for example, certified detection of liveness and a selfie). This strong integration of verifying someone’s identity, connecting that individual to biometrics that are face-based, and securing a transaction with a certified detection of liveness lets a financial institution operate security in this digital age. It is safe to say that regulations are here to stay. Therefore, regtech will remain a necessity of companies running their businesses. To find out how technology can aid you in meeting regulatory requirements more efficiently when it comes to identity verification, you are encouraged to review iDenfy identity verification technology, which is AI-powered.