Regulatory technology, also known as RegTech, is an industry that has been developed to aid with the financial technology (FinTech) industry to streamline the process of maintaining regulatory compliance for FinTech services and solutions. It is sometimes considered a subset of FinTech, but it is used in other industries, such as healthcare, gambling, law, and insurance.
The purpose of RegTech is to provide consistency and transparency when various FinTech companies need to update their services to be in compliance with regulations, which are often updated and changed.
Different types of technology are used to develop RegTech solutions, including the following:
- artificial intelligence (AI) and machine learning (ML)
- Big data
- natural language processing (NLP)
The need for the formation of the RegTech industry is often tied to the Dodd-Frank Financial Reform Act of 2008. The act was passed in response to the financial crisis of the same year that devastated both U.S. and global economies.
It is reported that the financial crisis was due to a lack of regulations on swap dealers. The act was developed to increase transparency and improve pricing in the derivatives marketplace and also to decrease the risk that the American public faces when engaging with the financial system.
The regulations that came with the Act and the following acts were complex and comprehensive. Around the same time, artificial intelligence (AI) began to be leveraged more in the technology sector. The need to streamline the process of ensuring compliance with financial regulations combined with advancing AI applications allowed for RegTech to be formed.
The following are examples of regulations that are considered when developing RegTech:
- Financial Action Task Force recommendations
- The Patriot Act
- The Bank Secrecy Act
- EU Money Laundering Directives
- Know your customer (KYC) regulations
In the RegTech industry, AI and machine learning are leveraged for analyzing data, including historical data, to find behavior patterns that could create risks in a financial context. Machine learning expedites that process for a more efficient system. It can be used for transaction monitoring, anti-money laundering compliance and detection, and fraud detection and prevention.
AI and ML companies in RegTech
Big data is used to leverage large amounts of information for automation in RegTech with various types of data being used, including financial transactions, market data, and social media data. It is harnessed to be used for tasks such as regulatory reporting, risk analysis and management, and process automation. RegTech solutions that use Big Data are often developed to provide cost savings and efficiency gains for the customer.
Big data RegTech companies
When a RegTech solution collects data, it needs to be analyzed to reveal insights. RegTech solutions can use analytics to reveal patterns or anomalies within the datasets so regulators or companies can uncover trends within their own industry. Analytics can be used for various applications in the RegTech industry, such as monitoring finance board meeting minutes to ensure compliance and revealing risks from patterns in large datasets.
Analytic RegTech companies
Natural language processing (NLP) can be used in RegTech solutions to streamline the process of understanding compliance updates and applying them to the internal infrastructure of a solution or organization. Regulations are often indicated in lengthy sets of documents, either in print or digital formats, but it is sometimes difficult for companies to understand and ensure that they are actually compliant. The use of NLP in RegTech makes this process easier by pinpointing key information from the compliance documents.
NLP RegTech companies
In the RegTeg industry, blockchain technology can be used to transfer information quickly and easily. It can help to decentralize the location of where data is housed so it can be used for analytical purposes. Blockchain technology allows information from financial institutions and solutions companies to reside in the same place as information for regulations.
The blockchain is often used by RegTech companies for anti-money laundering and know your customer (KYC) regulation, which includes services and solutions for digital Identity management and control to ensure that the person or organizations making transactions are who they actually say they are when they engage in financial transactions.