In Greek mythology, the Lernaean Hydra was a creature that seemed impossible to conquer. For every head that was cut off, two more would grow in its place, making each victory against the beast seem fleeting. For community financial institutions (CFIs) today, the regulatory landscape can feel eerily similar. Just as one regulatory statute is met, it seems that two more emerge, each with new complexities and demands. As with the Hydra, the more you cut through the red tape, the more regulations seem to grow, demanding strategies that go beyond simply “cutting through” to truly manage the ever-growing beast. Regtech — technology that uses machine learning, blockchain, and/or other emerging tech to help manage regulatory compliance processes — is one solution that can help you stay compliant while also lowering costs and increasing efficiency.An Ever-Larger Regulatory LandscapeIf you feel surrounded by constantly multiplying regulatory requirements, you’re not wrong. Thomson Reuters’ Cost of Compliance report says that a new regulatory update appears every 7 minutes, for a total 500% increase over the past 10 years. Examiners enforce those regulations, too. In 2020, banks around the world were issued more than $14B in fines, mostly for violating rules meant to protect against money laundering. Following regulations can be expensive, too. PwC reports that companies spend between $1MM and $5MM, or between 1% and 5%, on compliance for each $1B in revenue. The financial burden is especially difficult for financial institutions that still use paper-based or outdated digital technology to handle compliance systems. According to Bain & Co., between 15% and 20% of these banks’ operational expenses go to governance, risk, and compliance. Their outdated systems are typically working at capacity, so they can’t be scaled up. Additional needs mean hiring more staff.Use Cases for RegtechOther industries also use regtech, including AI, healthcare, and anything that involves managing large amounts of data. Yet, the financial industry is regtech’s biggest customer, using it to monitor regulatory compliance, transactions, reporting, and case management. Your institution might use regtech in a variety of ways, including:
- Regulatory compliance. For CFIs navigating multiple jurisdictions or complex product lines, regtech may provide a convenient way to monitor relevant regulations, helping businesses stay informed and adaptable as rules evolve.
- Identity verification. Financial institutions need to know with whom they’re dealing. Regtech tools can support this by collecting individual data and comparing it to other known information, adding an extra layer of identity verification. For instance, it can compare real images of a customer with verified, government-issued identification showing the same customer, to spot any discrepancies. It can also analyze links to determine the relationships between parties in a transaction, which helps uncover potential money laundering.
- Regulatory reporting. Reporting transactions and case management histories to regulatory bodies, in the ways that each regulatory body requires, is a huge responsibility for CFIs. In 2020, one-third of banks said that they spent at least 5% of their annual budget on regulatory compliance. To help in this area, regtech can track this data and present it in almost any format.
- Risk analysis. The warning signs that a financial crime is about to take place are most clearly spotted in hindsight. Regtech tools may assist by reviewing past activity for patterns and maintaining an electronic watch on high-risk situations, allowing staff to focus on other priorities.
- Transaction monitoring. CFIs must promptly report suspicious activity, with the goal of preventing fraud. Regtech solutions, when adjusted to meet specific thresholds, may aid in automating this process to catch unusual activity in real time.
Overall, regtech can also help save time. AML professionals spend 90% of their time collecting data, rather than investigating suspicious activity. When data is readily accessible, teams may be able to conduct more frequent and thorough investigations. Even with a dedicated team, maintaining comprehensive oversight can be challenging. Regtech offers an automated, digital approach that may help your CFI stay aligned with regulatory responsibilities while potentially enhancing efficiency and managing costs.
