Head of RegTech, Virtusa xLabs
The post-crisis regulatory storm that began brewing in 2009 has gradually settled, and financial institutions have been adjusting their business models. This regulatory storm gave rise to RegTech, or regulatory technology, and a new breed of FinTech solutions for compliance has been rolled out across the European and U.S. markets. For financial institutions, this heightened focus on compliance has resulted in the deterioration of the cost-income ratio, driven by higher compliance costs applied to complex business processes supported by complex (and often arcane) technologies.
To add to the woes of financial institutions, the regulatory superstorm continued to swirl through 2015 with the EU's Markets in Financial Instruments Directive (MiFID II), which brought in its own (substantial) regulatory workload. If this wasn't enough, there were also continued deliberations over Basel III along with the proposal of a new set of Basel mandates in the form of the Fundamental Review of the Trading Book regulations. Collectively, these initiatives drive the cost of compliance higher and higher each year. Since 2008, regulators have imposed more than $300 billion in fines and penalties to firms failing to meet compliance standards. The industry is reacting accordingly-the cost of non-compliance now outweighs anything that might be gained from cutting corners. As a result of this shift, there has been an increasing demand for technology that supports compliance, ultimately leading to the birth and boom of RegTech.
RegTech is driving the FinTech revolution: With regulators demanding much higher levels of transparency, technology solutions that enable compliance are becoming increasingly important. Investment in RegTech has more than tripled over the last five years. With more than $20 billion invested in RegTech by banks in 20171, we are witnessing a fundamental tech-enabled transformation of financial institution's middle and back offices.
In 2018 we will see RegTech playing an even greater role that stretches well beyond financial services into virtually every industry. One example is the EU General Data Protection Regulation (GDPR). This represents a material overhaul of data protection rules and will come into force in the first half of 2018. Organizations in virtually every industry will need to make dramatic changes to the way they treat compliance and take heed of the huge financial penalties at stake should they fail to comply.
Predictably, many industries will take inspiration from financial services firms, rolling out specialist technology solutions to support the transition to a new era of oversight.
In financial services, the emergence of open banking models, AI for fraud prevention, AML surveillance on cryptocurrency transactions, blockchain-KYC integration, immersive experiences, digital twins, event thinking, and continuous adaptive security will each create a foundation for the next generation of digital business models and ecosystems. RegTech startups have accelerated the pace of technological change. They serve as a creative force‚ and also as a destructive one in the financial services ecosystem, challenging the very business models of incumbents.
Bank-FinTech partnerships are hard, but they're the way forward. At xLabs we're seeing that FinTech and RegTech partnerships can be a win-win situation for both startups and incumbent financial service providers, though it's worth noting that companies still don't all see FinTech as a tactical tool that drives short-term returns:
On balance, the future of RegTech looks bright. Projections show the global RegTech market reaching $6.45 billion by 2020 and with the burden and cost of compliance (and non-compliance) only going in one direction, we believe that this is a conservative estimate.
1, 2 PWC (2017) Global Fintech Report. [pdf]
Available at https://www.pwc.com/gx/en/ industries/financial-services/assets/pwc-globalfintech-report-2017.pdf
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Sanjeev Mallick brings over 20 years of experience in the technology industry and leads the Virtusa xLabs RegTech initiatives.