What do regulators, governments, investors, banks and other financial institutions have in common? A need for tech solutions to help them enhance cross-border communication, streamline commerce and safeguard themselves from bad actors — and now, regtech firms are stepping in to answer the call.
What is regtech?
Regulation technology, or regtech in today’s parlance, is technology that improves and updates compliance procedures, including tech tools for monitoring, regulatory reporting and security.
While often associated with financial technology (fintech) firms, regtech can be used across most sectors for any company with regulatory and compliance needs.
With projections showing a compound annual growth rate of over 22% from 2023 to 2032, the regtech industry is expanding rapidly — but there are still hurdles to overcome, especially for cross-border payments.
Why regtech is on the rise
One of regtech’s most important functions is helping firms understand and manage growing risks in the digital age.
A Thomson Reuters Regulatory Intelligence (TRRI) survey found that 20% of respondents used regtech for cyber resilience and 16% employed it for compliance monitoring, while combating financial crime, money laundering and sanctions registered at 14%, tied with onboarding.
The survey also found that nearly four in ten firms were expanding their budgets for regtech. Indeed, as more government agency regulators implement their own regtech solutions, the report suggests that firms reach out to their regulators in a bid to smooth the transition and “help bridge the apparent disconnect between firms and their regulators.”
In the wake of crypto-exchange FTX’s collapse, the TRRI report predicts increased scrutiny and an uptick in regulatory risk. As financial institutions rely more and more on technology for faster processing, better data management and enhanced risk monitoring, compliance will continue to be a key concern.
A vital tool to bolster real-time payments
Regulatory compliance is a fundamental building block of trust in the financial services industry. Noncompliant firms not only call into question their trustworthiness, but these companies can also face hefty fines. KPMG points out that in 2019 the US Securities and Exchange Commission (SEC) levied 862 enforcement actions worth a total of $4.3 billion.
Regtech makes risk mitigation and compliance more efficient and more effective, which is especially helpful amid a slate of complexities. From the accelerating digital transformation to the nuances of international regulation and preventing attacks from sophisticated fraudsters, firms need powerful tools to keep up.
The report also notes that regtech is expected to increase operational efficiency and improve the consumer experience.
An assist from this nascent tech sector may help companies focus on their primary business while facing compliance creep — a heavier burden navigating a thicket of rules and regulations that is subject to change month by month.
KPMG lists several regulatory programs with which companies need to comply: “anti-money laundering, counter financing of terrorism, anti-bribery and corruption, know-your-customer, modern slavery, watchlist monitoring, sanctions screening, and market abuse regulation.”
That’s a lot of accountability on firms, which can be facilitated by regtech software and solutions. Not surprisingly, Deloitte executive Kent Mackenzie predicts significant opportunities for regtech firms that can bring clarity and efficiency into regulation interpretation, compliance management and the automation of reporting.
How regtech fights financial fraud and crime
In an interview with Convera, Jessica Cath, Head of Financial Crime at regulatory compliance and financial crime consultancy Thistle Initiatives, discussed how payments companies and other international firms are using regtech solutions to combat financial fraud and crime.
Cath described the wide range of financial crime controls that are now driven or supported by regtech solutions, from identity verification to fraud prevention, sanctions screening to ongoing monitoring. The landscape is also continuously changing in light of new regulatory requirements.
“One example and use-case for regtech is the new authorized push payment fraud (APP fraud) mandatory reimbursement model for payments firms in the UK. The challenge here is that firms will be required to reimburse victims in the majority of cases, even though APP fraud is challenging to detect — particularly as faster payments do not allow firms much time to detect and stop a transaction.”
“Firms will need to make sure their fraud prevention controls are sharp — recognizing suspicious scenarios and blocking payments at speed… we can’t do this all manually.”
The bottom line, according to Cath, is the importance of “making sure you have the right tools to capture suspicious payments as they’re being made. Everyone wants fast payments, but if security is lagging and fraud is taking place, they’re not actually going to be realized.”
And that could be even more costly for everyone involved.
Want to learn more about the latest in cross-border payments? Sign up for Convera’s Currency Convo to get currency news, FX and market insights from our team of experts.
