5 reasons to implement regulatory technology

A short compliance guide for fintech start-ups, insurers, banks, and brokers.

Fourthline Forrester TEI thumbnailBy The Fourthline Team
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During the past decade, smart Fintech start-ups have disrupted the financial landscape by innovating financial services that have been established for centuries.

The internet has transformed the ways in which Millennials and particularly Generation Z shop, pay and engage. Financial services have revolutionized in response to consumer needs. These changes have urged regulators to constantly renew rules and regulations in order to prevent new forms of financial crime that have evolved during the digital payments age. The pandemic has accelerated this trend, as even more consumers turned to the internet for their basic needs.

Financial institutions have been under increasing pressure to implement strategies that protect their business from fraudsters and from the risk of being non-compliant. As non-compliance results in reputational and financial damage, banks have been forced to invest heavily in compliance. This requires growing overhead expenses to screen, detect, prevent and investigate suspicious transactions. Established banks have the resources to scale up their personnel in response to new regulations, but for small Fintech start-ups, the mounting pressure of compliance demands can become a potential roadblock.

Regtech enables fintechs to focus on innovation without having to worry about compliance

Financial institutions need a reliable compliance strategy that offers protection against financial and reputational risk. Non-compliance leads to expensive lawsuits, and large fines from regulatory bodies.

Fintech start-ups often lack the capacity to staff and train a compliance department, headed by expensive legal experts. Regtech offers an attractive alternative; Regulatory Technology automates time-consuming Customer Due Diligence (CDD) identification and verification procedures by using innovative technologies such as artificial intelligence, blockchain and machine learning.

Reasons to implement Regtech

1. Regulations vary across legal jurisdictions

Compliance rules and regulations vary per region, and per country. This is a major challenge for fintech start-ups that want to offer their services cross-border. Even in the European Union, where Member States have to follow EU directives (i.e. The EU’s 6th AML Directive), there are regional nuances in the way regulations are interpreted and implemented. Differences in rules and regulations require regional compliance expertise, which is crucial to configure automated risk management solutions. This is why partnering with a third-party Regtech company with in-house expertise can offer fintech start-ups guidance in a complex regulatory landscape.

2. Competitive advantage through fast and seamless customer onboarding

CDD/Know Your Customer (KYC) and anti-Money-Laundering (AML) requirements take up a lot of human resources, with most of the staff engaged fulltime in manual procedures. This is where Regtech can save a fintech start-up valuable time and costs. Thanks to AI-empowered technology, customer onboarding doesn’t have to take more than two minutes. This improves customer experience and offers fintech start-ups a competitive advantage. Complex processes are streamlined and automated, allowing the start-up to focus on the development of even more customer-friendly apps to shake up the competition.

3. Fraud Prevention

Rule-based risk management solutions require high overhead expenses to investigate alerts, the majority of which happen to be false positives. Integrated compliance and risk management can reduce false positives by implementing a strategy that is risk-based. Risk-based technologically can result in more fraud detection with higher accuracy. Optimized fraud detection within a comprehensive compliance framework feeds accurate data into user-friendly reporting tools, designed meet the requirement of local regulators.

4. A solid compliance strategy empowered by regulatory technology

During the last years, we have seen how banks with a solid reputation have seen their brand damaged by serious money-laundering scandals. According to the UN Office on Drugs and Crime, the estimated amount of money laundered annually is between $800 billion - $2 trillion.

Large banks such as HSBC, JPMorgan Chase, Deutsche Bank, Standard Chartered and Bank of New York Mellon were all accused of moving dirty money for over 20 years. HSBC, paid a $1.9 billion fine for failing to prevent mafia from using the bank to launder hundreds of millions of dollars. In 2017, Deutsche Bank was fined nearly $700 million for allowing money laundering and Dutch bank ING Groep NV admitted criminals had been able to launder money through its accounts and agreed to pay $900 million to settle the case. These are just a few cases that highlight the importance of implementing intelligent compliance strategies, which include innovative Regtech solutions in order to prevent financial and reputational damage. The latter is especially crucial for younger, early-stage fintech companies: even minor reputational backlash while a business is still establishing itself could hinder them before they even get started.

5. Operational excellence as you grow

Regtech offers fintech start-ups the freedom and flexibility to implement solutions on a modular basis, which means that state-of-the-art digital identity solutions (i.e. Document Verification, Biometrics Verification, Watchlist Screening, Proof of Address, etc.) can be implemented according to the particular needs of a FI, whether fintech start-up, bank, insurance company or a broker. Cherry-picking the modules according to business needs significantly reduces the pressure on overstaffed back-offices and results in cost reduction.

Compliance is key to a Fintech company’s security, stability and success

Pressured by alarming fraud and money-laundering scandals, lawmakers are fighting to keep up and new regulations are changing rapidly. In a financial industry subject to updated rules, regulations and directives which vary per jurisdiction, compliance is often seen as a necessity to protect a company’s reputation, stability and success in a digitalized world. But what if compliance can be transformed from a ‘headache’ into a cost-reducing and competitive asset?

Gabriele Rosati
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Get in touch with Gabriele Rosati, who brings years of financial industry expertise at Fourthline.