Why RegTech, Why Now?

Look no further than the recent Wells Fargo scandal or even the monumental Brexit decision to see how the regulatory space is heating up.

Companies both big and small are looking across their regulatory frameworks to anticipate the impacts of these massive industry events.

Stephen Ufford, founder and CEO of Trulioo, said businesses are focused on creating efficiencies in order to have room in their roadmap for the unknown, which also means they are consuming the tools available in the market today at a faster rate.
But the idea of using new technologies and solutions to tackle high-density problems really isn’t a new concept.

Though regulatory technology isn’t new, Ufford believes it’s a sign of the times that the RegTech catchphrase has exploded in the last 12 months.

“It’s not just a Silicon Valley catchphrase; I think it’s real because there’s a pain point,” he explained.

His definition of RegTech is automating highly manual processes or high-cost centers to achieve a new level of scale, but this definition can mean different things depending on the business itself.

For a small payments company, RegTech can be used to help determine how they can help their customers in a modern way without having to establish all of the back-end infrastructure of a big bank that’s been around for a hundred years.

Unlike a big bank that’s been in the regulatory crosshairs for a long time (with the time and resources to put the right systems in place), newer FinTech companies are now running to RegTech to solve big problems quickly, Ufford explained.

Not only are they looking to RegTech to solve big problems fast, they also want to be able to continue to scale globally without any impact to their customer journey.

Raising The RegTech Bar

It’s no question that compliance is now a massive line item on the balance sheet of bigger banks. From a regulatory perspective, the more scale a business has, the more open they are to scrutiny.

“For the banks, it’s a little more about efficiencies and cost savings, in a time when there’s been more scrutiny on them and more processes that are being put in place,” Ufford noted.

Big banks are realizing that, in order to be competitive with the new crowd of FinTech players, automation is necessary. The goal of RegTech is to use automation to create efficiencies in processes and systems where the human element isn’t required.

In the AML and KYC space, much attention has been placed on using watch lists, but these checks come with an added level of complexity when it comes to focusing on what the human brain is capable of doing versus what AI or machine learning can accomplish.

For a firm that’s subscribed to 900 individual watch lists, it’s risky to place that type of burden on the human brain alone.

“How can any one human, or even group of humans, really effectively coordinate a watch list check manually anymore?” Ufford asked. “This is an area of innovation in RegTech; I believe software will greatly improve the accuracy and the intended use of the watch lists.”

The same can be said when it comes to identity management and onboarding, though the debate for manual versus automated processing still stands.

Ufford said that, not too long ago, a compliance person would have had to manually submit reports to the regulator, even having to use a fax machine to send the reports. This type of scenario is fine for a credit union that onboards three or four new customers a week but is not an efficient solution for bigger banks.

“If you are a money transmitter or an online bank that has onboarded 900,000 customers in 60 days, that old process could really actually get you in a lot of hot water,” he noted.

A New Regulatory Reality

Though, ideally, regulatory and compliance should be held to the same standard for all, it’s definitely not a completely level playing field for everyone in the space.

Putting RegTech in place can come with different challenges for different players.

Ufford said that, while everyone agrees automation is the right thing to do, the hardest part is figuring out exactly where to start in making it a reality.

“Our argument is that you probably should have something in place to scale, but that’s not always in practice the easiest thing to do,” he explained. “Ripping out multibillion-dollar systems that have been put in place over decades is not the easiest thing to do even if you want to.”

But as the regulatory landscape continues to change, both big and small players will have to adapt to keep up.

Ufford explained that the future of RegTech will include some of the big guys getting smaller, while the newer companies may be able to grow in size due to their ability to scale their regulatory practice.

“Even two years from now, I think some of the big guys will be broken up, and they have to be, because there’s no way they can be competitive the way that they’re built,” he added.

All of the things that feed into compliance require good systems to make sure that companies are not unintentionally violating the rules, but no matter what, the increasing threat of cybercrime still looms.

With this in mind, working together as an industry to stay ahead of the curve may be key to fighting back against online fraud and financial crime.

“The only thing that’s proven over time when it comes to dealing with those types of threats — the ever-escalating threat matrix — is some type of consortium or cooperation amongst all the industry players,” Ufford said.

“The faster the attacks start happening, the faster the desire to collaborate will emerge.”