What are the drivers to RegTech adoption in financial services?
05 November 2018
Organisations spend between $1- $5 million for every $1 billion in revenue on regulatory compliance[1]. With the cost of compliance making up such a high share of revenue, it is no surprise that over-regulation remains a top threat to company growth across the world[2].
To remain competitive, firms are increasingly looking to RegTech companies that provide data driven solutions that are scalable and adaptable to client needs. What sets these new technologies apart is their ability to help organisations quickly analyse vast amounts of data that enable them to (i) gain insights into their operations and lines of business; (ii) gain insight into customer behaviour and (iii) effectively assess and address potential compliance issues. And based on our industry experience, it is the combination between the use of emerging technologies/analytics and proven gains that makes a successful solution.
The use of RegTech solutions in Anti Money Laundering (AML) and Know Your Customer (KYC) on boarding, for example, is already hugely successful due to the significant efficiency gains achieved through the deployment of Robotic Process Automation.
Having surveyed over 800 risk and compliance executives[3], we found that it is the ‘compliance leaders’ that commonly invest into tech enabled infrastructure to support a data driven compliance function[4]. Compared to their peers, the three key tools that ‘leaders’ most often use are (i) data analytics tools; (ii) dashboards and (iii) continuous monitoring. They are also more likely to adopt new and emerging technologies like predictive and automation tools.
The increasing interest in RegTech becomes evident when tracking the investment into solutions. Last year alone, more than $1 billion was invested globally into RegTech startups[5]. In the first quarter of 2018, investment amounted to $533 million, indicating that this upward trend will persist.
With increasing regulatory reporting requirements and regulatory enforcement actions, the trend to move towards technology enabled solutions is likely to continue. In a highly regulated industry, the effective use of RegTech will increasingly widen the gap between the ‘compliance leaders’ and the rest.
While the current environment undoubtedly encourages the adoption of RegTech solutions, there are still major challenges and risks that need to be addressed. Some of these challenges stem from within the business. I refer to these as the ‘internal business challenges’. Other challenges and risks are external and need to be addressed by industry and regulatory authorities in cooperation.
Internal business challenges include: defining a strategy and vision, developing a governance framework, generating and retaining business engagement and support, leveraging effective change management capabilities, investing into cultural change, education and training, etc. These challenges are not unique to the adoption of RegTech solutions. In fact, these are some of the common pitfalls that we face in digitisation programmes and need to address to deliver successful outcomes.
Challenges that are external to the business need to be addressed by RegTech companies, regulators and Financial Services organisations in collaboration. I discussed some of these aspects in my previous blog and at the GI2 Conference. They include the need to address regulatory uncertainty by designing a long-term policy and regulatory framework that is compatible with, and supports RegTech.
It also relies on ensuring transferability and scalability of solutions, developing standards and defining the rules of engagement to secure system stability in the long run.
To harness the benefits that RegTechs have to offer, these challenges and risk need to be considered. While it is harder for one organisation alone to address and influence the external challenges and risks, organisations are now already able to tackle the internal challenges to ensure that technologies that can be implemented now already don’t fail.
Look out for PwC’s upcoming blog on ‘Delivering digital change’ where we will be discussing roadmaps to implementation.
Rav Hayer | Banking Data & Analytics Partner, PwC United Kingdom
Profile | Email | +44 (0)7841 468 296
[1] PwC, The Business and Cost of Compliance 2018.
[3] PwC, The State of Compliance, 2018.
[4] PwC, The State of Compliance, 2018.