The RegTech market is expected to grow from $6.3 billion in 2020 to $16 billion by 2025 at a Compound Annual Growth Rate (CAGR) of 20.3%. Some of the main drivers behind that growth include increased costs of compliance, lower entry barriers with SaaS-based offerings, a rising need for faster transactions and a regulatory sandbox approach to support RegTech innovations.
The use of Machine Learning, Artificial Intelligence and blockchain all provide growth opportunities for the RegTech market. What is more, the emergence of RegTech into the non-finance sector offers additional revenue streams for vendors in the market. Regtech software plays a crucial role in continuous monitoring and compliance management, making it an essential tool for financial institutions to minimize risks and costs associated with non-compliance.
In this article, we will dive into the world of RegTech solution to discover how to build a software solution that meets compliance and regulatory requirements. Let’s begin!
What is regulatory compliance and why is it important?
Regulations are the rules that are enforced usually by governmental agencies. They are crucial as they set rules and standards for what can and cannot be done in businesses. One of the most recently introduced policies that is frequently mentioned also in the terms of software development is GDPR in Europe (enforced in 2018) protecting individuals’ personal information. If you wish to get more information about how to make your software GDPR compliant, read the post How To Meet GDPR Requirements In Mobile And Web Applications.
The degree of compliance is up to each business to decide based on their risk management practices. Not complying with those regulations can result in high fines and a potential loss of reputation, so the first thing to do when starting any kind of business is to get to know the laws and regulations applicable to your situation as some of them apply to all industries while others are industry-specific. A great example of an industry-specific regulation is HIPAA (Health Insurance Portability And Accountability Act), which is applicable to eHealth software. More about it in the article How To Make Your Custom Software HIPAA compliant. There are also Know Your Customer (KYC) and Anti Money Laundering (AML) regulations strongly connected to the financial sector.
Financial institutions comply with these regulations to avoid penalties and maintain their reputation, often investing in RegTech solutions to enhance their compliance processes.
The main problem with regulation is that there are hundreds of them and new ones appear rather frequently. The best solution is to hire legal staff and create a compliance department that will handle all that, however, not every company can afford it. And this is where Regulatory Technology (RegTech) comes in.
What is RegTech?
RegTech is the management of regulatory processes through technology usually within the financial industry. Its main features include regulatory monitoring, reporting and compliance. RegTech consists of a group of companies that use cloud computing technologies through SaaS to help businesses comply with regulations. It is known as regulatory technology.
Brief history of RegTech
Regulatory Technology, commonly known as RegTech, has its roots deeply embedded in the aftermath of the 2008 global financial crisis. This crisis led to a significant surge in regulatory requirements, making it increasingly challenging for financial institutions to comply with the new, stringent rules. In response to these challenges, RegTech emerged as a beacon of hope, offering innovative solutions to help financial institutions manage their regulatory compliance more efficiently.
The early 2010s marked the rise of RegTech, with the advent of groundbreaking technologies such as artificial intelligence, machine learning, and big data analytics. These technologies empowered RegTech solutions to process vast amounts of data swiftly and accurately, thereby simplifying the compliance process for financial institutions.
Over the years, RegTech has evolved into an indispensable component of the financial services industry. Financial institutions have increasingly adopted RegTech solutions to navigate the complex regulatory landscape, ensuring they meet all regulatory requirements. Today, RegTech stands as a rapidly growing industry, continually innovating and introducing new technologies to enhance regulatory compliance.
Importance of RegTech in the financial services industry
In the financial services industry, RegTech plays a pivotal role in enabling financial institutions to manage their regulatory compliance more effectively. Navigating the intricate web of regulatory requirements can be daunting, but RegTech solutions simplify this process, reducing the risk of non-compliance and the hefty fines that come with it.
For financial institutions, maintaining a sterling reputation is paramount. RegTech solutions help ensure compliance with regulatory requirements, thereby safeguarding institutions from potential breaches and the associated financial penalties. By adopting RegTech, financial institutions can focus on their core operations, confident that their compliance processes are robust and up-to-date.
Moreover, RegTech significantly enhances risk management and regulatory monitoring capabilities. These solutions enable financial institutions to identify and mitigate risks more efficiently, reducing the likelihood of financial losses. The automation of compliance processes is another major benefit, as it minimizes the manual effort required, allowing institutions to allocate resources to other critical areas such as customer service and product development.
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5 categories of RegTech
After analyzing around 333 RegTech companies, Deloitte managed to identify 5 main categories of Regulatory Technology, which are as follows:
Since the regulations world is very dynamic it can be difficult, or nearly impossible, to keep up with all the changes and newest rules. That is why machine learning and AI help to ensure compliance by automating processing like:
searching for new or changed regulations
reporting
data analysis
sharing the impact of changes
AI algorithms monitor and track the current state of compliance and regulations in real time, eg. 6clicks.
The identity management and control include the Know Your Customer (KYC) processes that are usually performed manually. However, RegTech solutions by making use of AI and machine learning can help gather the necessary information from multiple sources and help to analyse them, eg. Accuity
There are also RegTech solutions that can monitor risk by identifying situations based on delivered data. In the financial sector, they can be used to predict market changes and mitigate risks. It allows detecting compliance and regulatory risks, assessing risk exposure and anticipating future threats, eg. 360factors
The right software can aid in the reporting process by automating it without the need of involving employees. As a result, we get correct data on time, limiting possible human errors. The regulatory reporting processes that can be optimized by using AI are:
regulatory change management
data validation
data processing and preparation
categorization and classification
analytical calculations
Enabling automated data distribution and regulatory reporting through big data analytics, real time reporting and cloud can bring significant time and cost savings, eg. acarda GmbH
A process of monitoring transactions that go through banks, online shops or other financial institutions in real time. This helps to identify potentially suspicious activities and flag illegal ones. Robotic Process Automation can help to analyze and monitor transactions faster and more accurately than any separate department by leveraging the benefits of distributed ledged through Blockchain technology and cryptocurrency, eg. Analyze N Control
Read also: Top 25 RegTech Companies In European Union
The RegTech process
Generally speaking, all RegTech processes can be divided into four main parts:
The first must-have of any business or process is customers. Process automation requires understanding the customers’ needs and the compliance requirements that apply to your customers. The signing up process, therefore, involves validating and verifying customer information eg. proper verification of customer’s assets and finances will help you detect any frauds or threats.
Monitoring is a process of continuously watching all customer activities. Once they sign up, you get access to their transactions that can be monitored by the software. RegTech uses cloud computing and big data to manage that data flow.
The next step is where machine learning comes in handy. While monitoring transactions and activities it is crucial to look for recurring patterns or flags. Once you have extensive knowledge of types of frauds and their mechanisms, you will be able to write detection logic and use machine learning to discover those patterns and detect them.
When regulations are not being followed this is where reporting intervene. Once you have enough information about the detected suspicious activity and you can prove a breach you have to report it to the regulatory authorities. No compromises here - this proves the integrity of your services.
How to build a custom RegTech solution?
RegTech solutions are valuable because they standardize regulatory processes while providing clear interpretations and automating compliance processes. There are some key features that turn valuable software into a great one.
speed: the ability to configure and generate reports quickly is a crucial benefit of any automation software. RegTech accelerates the regulatory compliance process as almost any task can be taken care of by software significantly reducing risks.
agility: technologies you use should allow extracting, transferring and loading complex data and turn them into ready-to-use information. Thanks to using cloud computing and machine learning RegTech solutions understand the process and quickly adapt to changing regulations.
analytics: advanced analytical tools can have a great impact on the company’s strategic decisions. Those tools help RegTech represent information in an easy to understand way and filter the data.
integrations: easy customization and integration with various 3rd party tools make a product suitable for various institutions. The RegTech processes use a different combination of technologies for different steps eg. cloud computing for monitoring, machine learning for the detection phase. Some RegTech solutions can also be integrated into the already existing company’s software.
Since regulatory technologies are a specific domain they imply a strong knowledge of FinTech and law. This requires an experienced team of developers that had previous exposure to this field.
Generally speaking, the process can be narrowed down to 6 steps:
Research: define the scope of your MVP and the features your software should have. Research the solutions available on the market as well as your target clients.
Build a team: form an in-house or outsourced team of developers that will help bring your idea to life. It is crucial that they have some experience in the FinTech/RegTech field.
Choose a technology stack: there are obviously many programming languages to choose from. Not to mention those responsible for mobile application development. Your team will definitely help you make the right decision, so do not hesitate to consult them.
Design UX/UI: the most important thing is to not load your application with loads of unnecessary features. Consider adding some vibrant colours and intuitive navigation.
Test: test your solution on a chosen number of customers to gather feedback and ensure if everything works as it should.
Monitor and update: since regulations are constantly changing and new ones continuously appear you have to ensure your software stays updated and relevant.
How we developed compliance and regulatory software?
At Selleo, we have years of experience in building various types of software, including RegTech solutions. Let’s take a quick look at the two of them.
Alyne - Compliance Management Cloud Software
A SaaS platform for making risk-aware decisions focused on digital assets. The solution aids organisations in all industries in maturing cybersecurity, risk management, compliance capabilities while helping to cost-effectively measure maturity. As a result of the collaboration with the client, our Ember team created a digital dashboard that helps companies know their compliance requirements and perform risk analytics.
The digital dashboard with intuitive navigation and fast searching supports businesses in implementing legal and regulatory requirements and aligning with industry standards.
If you want to find out more about the project, go to our portfolio page.
ECIT Labs- Compliance Management Application
An app designed to aid in the process of verification of business entities. It helps to streamline the KYC processes and has the ability to perform AML searches. Our React team managed to build an application that enhances performance and provides more reliability with regulation compliance. It offers bank-level security of user identification to provide confirmed information about organizations and people. ECIT delivers an efficient customer experience and increases the overall quality in the accounting service delivery field. More information about the project here.
Conclusions
There are some ground rules that every company has to follow - no matter the size in order to maintain order. RegTech solutions help those companies to continually meet those compliance and regulatory requirements while saving time and money. RegTech uses SaaS technologies, cloud computing, big data and artificial intelligence to manage regulatory compliance and automates the crucial processes. It also helps organizations reduce threats like cyberattacks, security breaches or money laundering.
So if you are looking for a team of developers with vast experience in creating RegTech solutions that will help you ensure your company meets all the compliance and regulatory requirements, contact Selleo to schedule a call.
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