Ten years after the 2018 financial crisis: the rise of regtech!
1 November 2018
Ten years ago the 2008 economic crisis hit rock-bottom, and everyone was in fear of what would be next. Would it get worse before it would get better? What would be the impact on our daily lives? I remember talks at the vending machine: imagine if a banker would have gone on a few weeks’ holiday to a deserted island without access to the news. The banker would have never believed the new reality of a world without Lehman Brothers, to say the least.
So many things happened after that, a butterfly effect on a large scale. The regulator stood up to the tame the beast of the financial industry. Many banks got financial backup from their governments, and many were nationalised. Indirectly, the man or woman in the street got involved too – ordinary people financing the perceived misbehaviour by banks through increased taxes. Thus the banking crisis became personal, and the traditional feeling of trust and security in the banker was lost. The general public was furious.
That’s when fintech was born, a totally new way of looking at the world. Early fintech companies where convinced that they could do better than their predecessors, the banks, by focusing on adding real value for their clients at a significantly lower cost. Although the rise of fintech has yet to overtake traditional banks, it would be wrong to say it hasn’t brought anything to the industry. The opposite is true – fintech has changed the industry at its core, bringing a new focus on the client, more agile delivery models and an acceptance of new technologies such as cloud. But above all, it has created a platform for change.
Regulators worldwide are reshaping the rules of the game by plotting new rules to work to – it’s estimated that 60,000 compliance documents have been written since the crisis, such as Dodd-Frank, Basel III, EMIR and MiFID II, predominately introduced to improve transparency, market efficiency and investor protection. Whether larger or small, businesses will need to invest to ensure they stay compliant. For example, in wealth and asset management, independent financial advisors (IFAs) have significantly fewer resources available than international private banks, even though both are subject to same MiFID II regulations.
Successful startups solve problems and satisfy real needs. This is the only way to become successful and survive the fierce competition. In my opinion, this is where fintech turns into “regtech” – solving industry issues related to regulatory matters in the financial industry. Regtech firms are not in competition with incumbents, but are fully collaborative.
Collaboration is the cornerstone of regtech: of technology, processes and people. The latest FINRA regtech report talks about five applications in our industry:
Surveillance and monitoring: the industry is investing in regtech tooling that seeks to use cloud computing, big data analytics and AI and machine learning to obtain more accurate alerts and enhance compliance and staff efficiencies, surpassing traditional rule-based models and moving into a predictive risk-based surveillance model. The increased use of AI and machine learning creates new challenges for banks, however, wherein they must account for decisions made by new technologies.
Customer identification and AML compliance: regtech startups and incumbents’ firms have started to introduce solutions for customer identification (KYC) and AML that are designed to employ technology to develop more effective, efficient and risk-based systems.
Regulatory intelligence: regtech companies are providing tools for a real-time catalogue of regulatory requirements in a user-friendly manner, including timely reminders of changes and review obligations. Natural language processing (NLP) and machine learning are key technologies used.
Reporting and risk management: solutions in this space leverage technology to develop tools to facilitate or automate processes involved in risk-data aggregation, risk metrics creation and monitoring, and regulatory reporting.
Investor risk assessment: in order to provide appropriate investment advice to clients, firms must seek information from their clients and apply reasonable policies and procedures to determine the investor’s risk appetite and tolerance.
When I look at my own day-to-day activities, the box is ticked for at least three of the above applications. Meeting various players in all shapes and forms on a daily basis, I’m convinced that strong collaboration with Regtech solutions has changed from something that’s nice to have to one you must have. In order to stay leader of the pack, you need to future-proof your business. That’s when you change compliance from a compulsory task into a real unique selling point.
Originally published in Business Reporter Online: Future of banking and fintech - October 2018