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What is RegTech and why is it becoming the next big thing?

​Even though the concept isn’t innovative in itself, many FIs are already pushing the limit with RegTech to use it within more complex systems in order to achieve regulatory compliance.

What is RegTech?

Not to be confused with FinTech which is used to provide software for financial services, RegTech is exactly what the recognizable abbreviations say – regulatory technology or as Deloitte said: "RegTech is technology that seeks to provide nimble, configurable, easy to integrate, reliable, secure and cost-effective regulatory solutions."

Why is RegTech important?

The cost of compliance and risk mitigation over the past couple of years has risen to the probably unexpected heights. According to experts in the field, operating costs spent on compliance have increased by over 60% for retail and corporate banks.

Along with the cost there is an evident volume and complexity of both existing and upcoming regulations have had the unintended but very real consequence of encouraging financial service providers to focus on compliance rather than innovation. And the following are just some of the regulations tech companies are faced with: the Payment Service Directive 2 (PSD2), the Markets in Financial Instruments Directive (MiFID), the fourth Anti Money Laundering Directive (AMLD IV). These are just a few examples of the shift in terms of compliance and risk, and governance and supervision with which all actors must comply with.

These are all the reasons why RegTech was being developed. It promises to enable firms to decrease cost, rein in compliance risk and improve controls.

Growth of regulatory technology

Recent innovative fintech softwares are certainly affecting the growth of Regulatory technology. The software is "creating automated solutions to manage regulation monitoring, compliance, and reporting. Keeping track of new restrictions in a single database is a comfortable way of adopting a financial institution to legal requirements", according to Information Age.

However, now we are in the era of RegTech 3.0, the number saying it isn't a new type of technology. Here is how it grew throughout years:

  • 1990: The first version of RegTech 1.0 helped analysis ofrisks of specific processes.
  • 2000: RegTech 2.0 developed for FS to focus on the need for KYC (Know Your Consumer).
  • 2010: The new RegTech aimed to allow firms to innovate and grow but due to changes in the industry there were increasing regulatory pressures and law changes.
  • 2020: The industry moves from KYC to Know Your Distributor (KYD), given the rise of FinTechs and crucial data infrastructure that make up many FS firms.

Now, there are more than 100 providers of RegTech solutions worldwide.

What are innovation trends of RegTech?

Even though the concept isn't innovative in itself, many FIs are already pushing the limit with RegTech to use it within more complex systems in order to achieve regulatory compliance. An example is "mapping functional taxonomy to the language used by regulators" which results in a direct link between regulatory authorities and compliance practitioners.

Analysts also believe that next year will drastically fuel the growth of innovation in RegTech new and challenging regulatory concerns. 

Therefore, it is believed that RegTech companies will focus on innovating data quality as a selling point even more.

Future of RegTech

The future of this progressively used technology is not easy to talk about since it just started becoming a thing. However, with the results it already brought to the numerous FI or payment processing companies, the future seems far from bleak.

Without even mentioning innovation in tech in general which will indubitably touch RegTech too, the existing systems and concepts are already showing promise when it comes to handling the complex ecosystem of the current and regulations to come.