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January 15, 2020

RegTech grows in FinTech as Financial Organizations Seek to Avoid Fines

The financial service sector is going through some dramatic changes. New technologies create new opportunities for financial crime and fraud. Combined with the ever-increasing volume of regulations, the challenge of compliance is growing. However, meeting current compliance standards means a more efficient, safer, and more cost-effective provision of financial services. Due to record investments and the huge growth of Fintech brands, traditional financial institutions are finding that they have little choice but to shift their ways of protecting their business from fines for non-compliance. Digital innovation is required to match the demands of consumers, and Regulatory Technology (RegTech) is quickly becoming an essential component of the financial service sectors. With all of the benefits that emerging RegTech solutions promise, financial institutions need to start looking forward if they want to protect their future.

Digital Transformation

As technology is being increasingly used to improve both the compliance and the security of financial organizations, an entirely new branch of financial technology (Fintech) has seen a high level of growth. RegTech is being used to help those organizations maintain high levels of trust in the services that they provide. The use of RegTech to provide organizations with machine learning, AI-enabled and data-driven software options that make the previously manual process of regulatory compliance significantly easier. Rather than using in-house teams of compliance experts that can make common mistakes and leave organizations vulnerable to fines, companies with a Regtech focus are now providing those institutions and organizations with the tech tools needed to grow, adapt, and change at the same rapid pace of those emerging RegTech solutions. 

RegTech and its Growth

Financial organizations now have to deal with an always-increasing number of regulatory changes. The combination of the EU Payments Services Directive (PSD2), cryptocurrency, Open Banking, and GDPR has lead to huge disruptions in the finance sector. As digitization continues to increase and financial organizations continue to remain under close scrutiny after the financial crisis of 2008, compliance is more important than ever before and more challenging to keep up with. The agility of RegTech companies offers a way to tackle those regulations while remaining safe at all times. The growth of RegTech companies is a direct response to a shift in thinking for those incumbent financial institutions that recognize the inadequacy of in-house manual processes and teams that are relying on traditional ways of maintaining compliance.

Growing Demand

There has been a rapid increase in investments in RegTech, driven by increasing demand. This has been the investment pattern since as early as 2013, but the growth has been staggering. Each year, investment figures reach new heights, with an estimated $5billion being invested in RegTech startups since 2013, and 2019 continued that trend. Those investment figures are only going to increase as the benefits of machine learning, automation, and artificial intelligence continue to be proven. Despite social and political changes around the world, the need for regulatory compliance remains paramount. And with the advantages of new industry-disrupting tools and resources thanks to the RegTech sector, growth seems set to continue.

Financial organizations are facing disruption from a variety of directions, and that’s leading them to explore and tackle new territories as they fight to avoid fines for non-compliance. Digital innovation through regulatory technologies can only be beneficial to those organizations that want to stay ahead of the competition and keep themselves safe from fines, as well as from political, social, and economic shifts. As cooperation between RegTech brands and financial institutions continues to grow, RegTech startups are simply enabling financial service providers with the tools they need to improve efficiency. As a sector that looks set to become a major player in an increasingly digital world, RegTech is only going to grow. 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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