Articles & E-Books


The Evolution to RegTech

Apr 24, 2018

So many articles have been written in recent years lamenting the regulatory burden heaped upon the financial services industry after the 2008 financial crisis. Financial institutions have dealt with these pressures in varying ways from merging into larger organizations with the infrastructure to handle compliance monitoring to engaging in growth tactics to reach a point of critical mass where it makes sense to continue operations to ceasing to exist altogether.[1] The entire landscape is in a period of rapid transformation, and the business model disruption, particularly in community banking, has been huge. Banking has never been a huge fan of change. And why not? The industry enjoyed a long history of profitable operations based on legacy infrastructures, traditional beliefs, and conservative values. The “sexy” tech world invading the financial services market is one not easily embraced by bankers even though technology and innovation have been quietly at the core of banking models for years.


The result of this changing landscape, as with any transformational change, has been the creation of a new set of opportunities obvious to those innovative thinkers willing to see an opportunity, rather than a threat, posed by this new set of circumstances. In recent years the Financial Technology (FinTech) industry has flourished due to the many restrictions placed upon financial institutions following the financial crisis. The more agile FinTech company could easily step in and fill a gap created by the loss of market participants in various areas of banking. How many community bankers decided to just exit certain service lines due to new regulatory constraints? While FinTechs have received most of the publicity, Regulatory Technology, or RegTech, is growing in popularity as financial services providers are learning that there are great strategic advantages to partnering with a RegTech firm, particularly when it could create operational efficiencies and comply with an ever-increasing list of regulatory pronouncements. RegTech can bring many benefits to the financial services industry, not the least of which is reduced costs. In a period of compressed margins due to a low interest rate environment and increased operational costs, this could be a welcome relief.


So, what is RegTech? RegTech is the use of new technologies to solve regulatory and compliance requirements. RegTech startups can provide a way to deal with the increased regulation through regulatory reporting solutions, data governance, fraud monitoring, AML-KYC and risk management, to name a few. RegTech solutions can provide the platform for supporting strategic growth agendas, bringing services to market quicker, enhancing consumer experience, and optimizing business processes all while meeting regulatory standards. Connecting business processes with regulatory obligations enhances control over the institution’s activities and provides better risk governance and protection from reputational risk.[2]


In a recent study of financial services providers, over half of the respondents indicated that they were monitoring compliance via hard copy certification.[3] I am sure this is not surprising to anyone reading this article. Operational costs are weighing down the traditional models of banking, in particular. The cost to meet the growing number of regulatory changes makes “doing things the old way” nearly impossible. Compliance teams are often overwhelmed at the challenge, and the urge to “throw in the towel” is present in many financial institutions. From an operational perspective, the number of new regulations coupled with antiquated systems has given rise to the RegTech industry.


So, what are the challenges facing the industry and how does RegTech solve these issues?  Among the biggest challenges facing the financial services industry are data quality, cybersecurity, cost constraints, legacy systems, manual processes, complex compliance, siloed operations, and regulatory uncertainty. “RegTech solutions are helping firms to better identify, monitor, and mitigate behavioral risks through the use of smart data, cognitive machine learning, and natural language and robotics processing.”[4] Through the use of artificial intelligence, big/smart data analytics, distributed ledger technology, and machine learning, RegTech firms can help a financial institution reach the ultimate goal of reducing errors, improving overall compliance, enhancing financial crime detection and fraud surveillance, reducing manual processes and human bias, enhancing cost optimization, and redeploying human capital so highly skilled compliance resources can move from routine processes toward analytics.[5] From the regulators point of view, “RegTech solutions also offer the potential to reinvent and streamline approaches to the regulatory and supervisory process through real-time surveillance, distributed ledger technology and data analytics.”[6] Some best use cases of RegTech lie in the AML (anti-money laundering) and KYC (Know-Your-Customer) solutions; however, RegTech solutions can be used to extract and manage data to better underwrite loans, provide better financial reporting, and ultimately enhance consumers’ service experiences. 


Overall the impact of noncompliance poses both financial and reputation risk. This has frightened a number of institutions out of the market. But innovation is not just for the tech companies; the financial institution must also embrace innovation and evolve if it wants to be a player in this new business model.


A recent regulatory brief by PwC helps financial institutions to prepare for RegTech. It proposes that they:


  1. Think like a tech company and let innovation drive business decisions.
  2. Define the “why” by defining a targeted use case and demonstrate return on investment.
  3. Leverage infrastructure by assessing current systems and identify long-term goals.
  4. Use a test lab to evaluate and find the right solution.
  5. Assess sustainability by ensuring the RegTech’s operating model and funding levels are stable.[7]


The overall objective of RegTech is to help the financial services industry by simplifying compliance with regulatory mandates by making outdated and manual processes more manageable, streamlining business processes, and reducing cost. It may require a different way of thinking, but the potential benefits could make all the difference in the life cycle of the financial institution.


According to John Waupsh in Bankruption: How Community Banking Can Survive Fintech, a fourth choice for community bankers after merge, grow, or die, is Evolve. Innovation is not just for the “sexy” tech company. The financial services industry is evolving, and it is possible for the financial institution to evolve with it.


[1] 2017, Waupsh, John, “Bankruption: How Community Banking Can Survive Fintech”

[2] April 2017, KPMG, “The Nexus Between Regulations and Technology Innovation”

[3] Dec 2017, Cordium, “RegTech Realities: Moving from Reactive to Proactive Compliance”

[4] April 2017, KPMG, “The Nexus Between Regulations and Technology Innovation”

[5] April 2017, KPMG, “The Nexus Between Regulations and Technology Innovation”

[6] April 2017, KPMG, “The Nexus Between Regulations and Technology Innovation”

[7] Oct 2017, PwC, Regulatory Brief, “Get Ready for RegTech”


Karen A. Mitchell
Senior Manager, Risk Advisory Services
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