Why Financial Executives should care about Regtech

Regtech, the portmanteau of “regulatory” and “technology, refers to the use of technology to transform risk management and regulatory compliance processes. Contrary to fintech, which aims to improve financial services, regtech focuses on enhancing regulatory processes and is often used alongside fintech to provide a comprehensive technology landscape.

What Exactly Regtech Does

This rising realm of fintech has made its mark in some important themes of regulatory compliance. It reduces financial crime by automating customer onboarding processes and monitoring AML transactions. With intense, ongoing yet low-cost monitoring, customer fraud and credit risk would be significantly reduced. On the risk management side, real-time analysis of market conditions allows up-to-date market risk assessment. Credit risk assessment could also be performed at high efficiency to validate lending services.

Before moving on, if you are interested in learning more about RegTech, check out EY’s 2019 RegTech Brief: Regulatory technology (RegTech): Navigating the right technology to manage the evolving regulatory environment

External Pressures towards Regtech Adoption

Regulators have increasing expectations towards banks and other financial institutions to maintain a high standard of regulatory management. Ever since the Global Financial Crisis in 2007, and the anti-money laundering scandals, the volume of regulation has been growing at full tilt to reduce financial risks. Although we are seeing a slow down in the establishment of new regulations, the high regulatory alerts urged businesses to rapidly adopt regtech.

As the public becomes more eloquent in the financial industry, they naturally become more aware of the complexity of banks. In addition, with the increase of digitalization, they bear higher expectations towards banks regarding their regulatory practises and risk management. As the banking sector continues to expand, it has the obligation to prevent any risk to protect their clients.

With that said, HKMA has developed a 2-year road map to foster RegTech development and raise awareness for this sector of fintech.

As the demands for Regtech increases, the industry observes a rise in Regtech startups. With a robust financial market and a comprehensive legal and regulatory system, Hong Kong acts as a strong foundation for these RegTech startups to take root. Hong Kong’s Cyberport also nourishes startups such as SuperAcc, Gekko AI and more.

Benefits of Regtech

Regtech enhances risk management and compliance by reducing human error, increasing speed and comprehensiveness of analysis, triggering earlier detection of potential issues, and allowing banking professionals focus on higher value tasks.

With suitable implementation, regtech significantly reduces regulatory costs by automating related compliance processes. By implementing technology to improve KYC processes, a typical bank can potentially save 40% in costs annually.

Time is money. Customer experience enhanced with efficient service quality under regtech, allowing financial institutions to gain a competitive edge in gaining and retaining customers.

Emerging Technology supporting Regtech Development

1. Artificial Intelligence (AI)

AI is an overarching concept behind the newest fintech, with the ability to mimic cognitive human functions like problem-solving, speech and visual perception and decision making. By automating business processes, AI could generate insight, detect patterns and issues, and interpret data at scale in real-time at superhuman speed and accuracy. 80% of Hong Kong’s RegTech solutions are driven by AI.

2. Machine learning (ML)

ML is an important branch of AI which allows machinery to learn and improve from experiences by themselves, rather than being explicitly programmed. This allows room for rigorous improvement since its invention. Say for example in transaction monitoring, the system could conduct ML and learn from the millions of transactions in order to identify faulty or abnormal ones. By leveraging on this capability of AI, regtech could improve efficiency and accuracy without immense cost or large change in the technology architecture.

3. Natural Language Processing (NLP)

Machines are able to interpret human language through NLP. With it, users and systems are able to establish two-way communication, like humans could. Text and audible speech can be analysed or generated by the system. It could, for example, automate the process of gathering customer information, by extracting written or textual information and formatting it into a standardized dataset. Its common use in applications such as chatbots and tools makes it a promising technology in Regtech.

The above information is extracted from the new RegTech 2020 White Paper by HKMA: Transforming Risk Management and Compliance: Harnessing the Power of Regtech

Some local RegTech startups like SuperAcc leverages these emerging technologies to provide state-of-the-art solutions for customized financial solutions. Its financial statement robot, SuperAcc, utilizes NLP and deep learning for knowledge extraction, document recognition and analysis to streamline regulatory processes. Learn more about the RegTech Startup, SuperAcc.