FinTech has brought about many advancements in the financial sector. But it has also created the need for complex new regulations, thus contributing to the development of RegTech. What is the connection between the two?
The regulatory environment is constantly evolving, which makes it difficult for organizations to adapt quickly to changing regulations. If they fail in this, they will put their business at risk. Financial technology (FinTech) businesses, in particular, have struggled with regulatory-driven transformation, which, in turn, has resulted in the development of regulatory technology (RegTech) solutions.
Read on to find out about the differences between RegTech and FinTech, the role of RegTech in financial organizations (including crypto companies), and tips for RegTech adoption in your business.
Before looking into the differences between RegTech and FinTech, let’s quickly define each concept.
What is FinTech?
FinTech is a term used to describe the technology that helps financial organizations automate the usage and delivery of their financial services. FinTech businesses generally rely on specialized software to manage their financial procedures.
FinTech creates innovative solutions in the financial sector, making tedious processes like fund management and loan applications more efficient and accessible to consumers. It is expected that the FinTech market may be as large as $300 billion by 2023.
What is RegTech?
RegTech is a technology that helps organizations, including banks and FinTech companies, manage regulatory compliance. Financial organizations must implement, enforce, and monitor various laws, rules, and regulations to ensure adequate financing, security, and compliance.
RegTech solutions help businesses automate mundane compliance tasks, make informed risk decisions, and streamline the entire compliance process. As a result, companies can focus on more important tasks rather than dealing with compliance procedures.
The size of the RegTech market is expected to reach $29.2 billion by 2027, growing at a CAGR of 22.7% during 2022-2027. Some of the key use cases where regulatory technology works best include:
- Legislation/regulation gap analysis
- Information management
- Activity monitoring
- Regulatory reporting
- Risk data warehousing
- Transaction reporting
What is the difference between RegTech and FinTech?
RegTech helps FinTech organizations manage complex financial regulations. Initially viewed as a subcategory of FinTech, RegTech is, in fact, a separate phenomenon that can be applied to multiple regulatory contexts, from tracking supply chain management procedures to monitoring companies’ compliance with environmental regulations; the applications are endless.
At present, RegTech and FinTech are developing in parallel with one another. The FinTech industry, together with the digital transformation it has brought about, carries multiple risks, the most common being data security. FinTech organizations are particularly interested in adopting RegTech solutions and implementing the right tools to avoid risks and maintain compliance.
It’s also worth noting that different forces drive these phenomena. FinTech development was driven by startups that wanted to create new ways to deliver products that would drive change in the financial market. In contrast, RegTech has emerged in response to the exponential growth of compliance costs and the need to automate compliance functions in organizations to reduce costs.
How does RegTech help FinTechs achieve compliance?
RegTech enables FinTech organizations to develop products that positively impact financial markets instead of spending time addressing regulatory overheads. Practically any financial solution necessitates regulation and compliance procedures: the domain of RegTech.
Overall, RegTech solutions can help FinTech organizations ensure efficient compliance management in the following ways:
- Ensure compliance with rules and regulations defined by local and global regulations across jurisdictions.
- Monitor regulatory developments in real-time, thus enabling FinTech businesses to adapt to new regulations promptly.
- Quickly deploy internal regulatory rules enterprise-wide.
- Improve data analytics to develop a more detailed picture of their client’s financial history.
- Recognize financial threats and risks more quickly by monitoring malicious activities and fraud.
- Reduce regulatory reporting timelines.
RegTech solutions can also be used for transaction monitoring and screening, identity verification and management, anti-money laundering compliance and detection, and fraud prevention.
RegTech and the cryptocurrency market
The development of blockchain technology and the spread of cryptocurrencies have introduced new financial possibilities and multiple benefits, such as increased transparency, disintermediation, and much more. However, it has also brought new risks associated with regulatory blindspots that lead to money laundering and other financial crimes.
In 2021, it was estimated that cryptocurrency-related criminal transactions amounted to about $14 billion worth, compared to $7.8 billion in 2020. Given the regulatory uncertainty that surrounds cryptocurrencies, it is vital for businesses operating in this space to understand their compliance requirements.
Crypto companies need to implement robust AML processes to eliminate illegal activities. Crypto assets face CFT/AML regulations worldwide. According to cryptocurrency guidance from the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), crypto businesses are subject to various risks and show inconsistent practices and procedures. Those businesses that don’t have access to AML monitoring tools risk falling short of FinCEN’s expectations.
RegTech solutions can help companies manage crypto compliance regulations and monitor financial risks in the following ways:
- KYC and AML procedures
- Transaction monitoring and screening
- Fraud detection and prevention
- Record storage and management
- Data security
How can your organization adopt RegTech?
RegTech can help you simplify and automate regulatory assessment and compliance management procedures, which are particularly important yet often cumbersome and time-consuming. If you plan to adopt RegTech for your organization, it would be best to start by:
- Researching your organization’s compliance needs and regulatory requirements.
- Understanding your regulatory data and reporting needs compared with local and global standards and regulations across jurisdictions.
- Consulting with your peer network to understand how they handle regulatory compliance and what solutions they are using.
- Surveying what RegTech solutions are currently available on the market and could meet your needs.
- Making a step-by-step plan to integrate RegTech into your organization.
The financial sector has always been subject to regulation. The sheer volume of new and existing regulatory requirements imposes multiple complexities and long timelines on financial institutions, which is why FinTechs are now turning to RegTech solutions.
With their ability to make regulatory compliance and reporting more flexible and cost-effective, streamline mundane compliance tasks, and reduce the operational risks associated with meeting compliance regulations, RegTech solutions have a bright future.
If you plan to adopt RegTech technology but don’t know where to start, contact our team or outline your query in the form below. Our seasoned developers and consultants will help you develop the right solution while assisting with its development and implementation in your organization.