What Is Regtech? Is the Financial Market Ready for AML Technologies?

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The explosive growth pace of fintech solutions is radically changing business models and processes in the financial services market – and digitalization is affecting both the private sector and financial control regulation. As regulatory technology (regtech) is spreading in the rapidly developing world, the AMLSafe team and I decided to do a little research in this direction.

These technologies started actively evolving after stiffening regulatory changes were introduced in the banking sector, as well as in the fintech and cryptocurrency field. According to research, the number of innovations in the financial sector has increased five fold since 2008 and staff spends around 10-15% of their working time on regulatory compliance.

According to a study conducted by Deloitte, North American chief financial officers consider stringent regulation to be the second biggest threat to their businesses, with recession leading the rating. In Australia, the economic cost of “red tape” was estimated at $128 billion. Breaching the new requirements puts the financial market players at risk of hefty fines. According to Boston Consulting Group analytics, large global banks have been collectively fined $300 billion since 2008.

What is regtech?

There are two ways to look at it –

• As a set of methods that allow you to effectively fulfill the regulatory requirements, simplify the reporting process and control risks

• As a modification and enhancement for the established business processes

In other words, the term “regulatory technologies” covers software solutions that allow banks and financial enterprises to comply with all statutory requirements with more efficiency but with less time, cost and risks. While they aim to optimize internal audit, compliance and risk management, these services allow you to manage risks in real time, prevent large losses and avoid imposing fines. These solutions help automate business processes, reduce costs and improve work efficiency.

Regtech and AML tools functionality

To understand how regulatory technologies influence fintech business processes, we should first highlight the regtech and AML functions.

• Automation of reporting and control over the implementation of regulatory norms

• Remote user identification and verification

• Financial transaction monitoring and identification of abnormalities

• Risk management and analysis

Both automation of reporting and control over the regulation implementation plays a key role in the field of regulatory technologies.

The inconsistency of different state regulations is the main obstacle for creating globally applicable solutions in this field. Despite having a common basis, regulation differs from country to country, which makes scaling technology significantly more complicated. However, there are a few cases of successfully developed global solutions in this area – NEX Regulatory Reporting technology allows preparing reports according to the regulatory requirements in Europe, US, Australia and Singapore. Vizor helps with insurance supervisory reporting, and Global Fund Watch helps with administration and legal reporting.

Remote identity verification (KYC) is the most common way to implement AML tools. This simplifies user verification, helps track suspicious transactions and manage risk. Using various algorithms, regtech companies create platforms for ID verification, as well as authenticating documents proving property ownership and residence, matching selfies with passport scans and checking for sanctioned or politically exposed persons.

Financial monitoring is mandatory due to numerous regulations. The 5AMLD directive, in particular, obliges providers in the cryptoasset market to both identify users and to demand documented proofs of the transaction nature. On the other hand, AML tools aimed at transaction monitoring can be used for analytics and business promotion.

Analysis, risk management and solution proposal – this aspect covers analyzing the client’s creditworthiness, the reputation and the condition of the businesses, as well as ensuring compliance with legal requirements. There are a few solutions in this particular field – ComplyAdvantage (company valuation), Kyckr Ireland (checking counterparties in Asia), Credit Benchmark (credit risk assessment) and Convercent (tracking innovations in legislation).

Certain aspects of AML tools and regtech implementation

Given the high cost of AML tools, the management usually starts demanding more from their compliance officers, urging them to make better use of their compliance data – and add value to the business.

And really, instead of investing in new solutions, companies can use off-the-shelf AML tools and regtech, improve their compliance with regulatory requirements and stay ahead of any incoming changes.

AML tools and regtech use cases

• Simplified reporting for regulatory purposes; the aforementioned solutions are aimed at eliminating human error

• Making data-driven decisions and increasing the value of the business as a whole

• A modern approach to business and long-term innovations implementation; this characteristic has critical value as regulations and business needs constantly change

This paradigm makes smart technologies like artificial intelligence (AI), machine learning, neuro-linguistic programming (NLP) and blockchain expand the capabilities of AML tools and regtech and make them a critical investment for all financial companies. Adapting to changing business needs and regulatory requirements, as well as staying competitive, is simply not possible without these technologies – which is why they are so important for fintech companies.

In the future, regulatory related costs will keep increasing as regtech is already in full action – compliance scaling, mitigating risks and even proactively addressing potential problems. Over time, regtech will ensure higher competitive performance among companies as automated tools respond to regulatory changes faster than most people-centered systems.

AML tools and regtech – additional burden or bigger opportunities

Regtech’s latest solutions use technologies like advanced analytics, robotic process automation (RPA) and even artificial intelligence (AI) – it allows to optimize regulatory compliance and helps create a functional, evolving, scalable and flexible model.

This way companies can adapt to various requirements like corporate governance automation, tracking regulatory changes and minimizing human error.

These new solutions embody the next phase of regtech’s transformation, which is characterized by the transition from “know your customer” to “know your data.” In these conditions, more funds are directed to business development.

Financial service companies can capitalize on this value by applying the right technology – decisionmakers define the best way to introduce regtech to get the best impact on workflow and reporting.

Therefore, the tightening of regulations drives fintech companies to implement regulatory technologies and AML tools – the cost of human-performed compliance increasing dramatically. And in some cases, it simply becomes impossible to keep up with all legal requirements manually.

The digitalization of regulatory and control processes plays a key role in creating a transparent and competitive financial services market. In the environment of mandatory regulatory compliance, financial companies need to use regtech to improve their competitiveness.

Therefore, regtech should not be seen as an additional burden but as a way to reduce costs, build analytics, eliminate the human factor, automate processes and make the right decisions.

References

1. The $176 billion tax on our prosperity – Institute of Public Affairs (2016), Mikayla Novak

2. CFO signals survey – Deloitte (2018), William D. Eggers

3. World’s biggest banks fined $321 billion since financial crisis – Bloomberg (2017), Gavin Finch

4. Regtech to the rescue – ACCA Global (2017), Iwona Tokc-Wilde

5. The regtech effect – Medici (2017), Medici Insights

6. ??????? ??????? ??????, ??? ??? ????? regtech – Bloomchain (2018), ?????? ???????

Slava Demchuk

Certificated anti-money laundering specialist in the crypto industry and member of Blockchain Ukrainian Association. Founder and CEO of AMLSafe and AMLBot.

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