How to Build a Thriving RegTech Ecosystem

The RegTech revolution is well underway, with differing centres of innovation arising around the globe. However what is needed to make a RegTech ecosystem truly thrive is often overlooked. Much more is needed then a mere technological capability, a sandbox and a desire to succeed.

So what is spurring this RegTech revolution? The ever-growing regulatory demands that financial institutions (FIs) & multi-national corporations are required to adhere to, have resulted in an expensive, time-consuming and a rather complex array of approaches to compliance (with many legacy systems being found to be unfit for purpose). This often leads to sizable enforcement actions, substantive reputational damage and terrible levels of customer experience (CX). If this wasn’t challenging enough, add in the cross-border nature of modern-day business and you have yourself a regulatory conundrum.

[Related: Poor cost of customer experience (CX) costs banks $10 billion + per year]

Recognizing the need to streamline their regulatory compliance, digitally transform their businesses and improve customer experience, especially with respect to ever-more-stringent AML (Anti-Money Laundering) and KYC (Know-Your-Customer) legislation, FIs are seeking solutions. Needless to say a range of RegTech (Regulatory Technology) companies & start-ups have arisen, some more successful then others (See below for an example of award-winning KYC RegTech from an established provider, like our own).

There is no doubt that the appetite for RegTech solutions is growing at a rapid pace. In fact, according to the report, “Global Regulatory Technology (RegTech) Market: Drivers, Restraints, Opportunities, Trends, and Forecast up to 2023,” RegTech revenues for smaller firms are expected to grow from an estimated $2.3 billion in 2018, up to $7.2 billion by 2023. Furthermore RegTech spend as a whole is expected to increase to $115 billion by 2025.

Whilst the potential benefits of regulatory solutions remain clear, widespread adoption rates are yet to take the financial industry by storm. Ultimately, it is argued that for RegTech to be the “gold standard” of digital compliance, an ecosystem of key stakeholders must collaborate on an industry wide basis. If many start-ups are to move beyond proof of concepts to robust and scalable players much more must be done.

[ Related: Why Digitalisation is the way forward for Private Banking & Wealth Management ]

The important role of regulatory bodies in the RegTech ecosystem:

In order to foster a deeper and more sustainable RegTech eco-system and to achieve widespread adoption, the phenomenon must have the full backing of regulatory bodies. Without this support, FIs may be somewhat reluctant to adopt certain RegTech solutions, not least because of an underlying fear that should the technology fail to achieve its compliance goals, the reputational and financial consequences could be dire.

Moreover, whilst FIs do not want to be seen as late adopters, there is also a strong reluctance to be the first-past-the-post. One such example of a leading regulatory body that not only is looking to drive the RegTech revolution, but also encourage firms from within the financial industry to embrace the technology, is that of the UK’s Financial Conduct Authority (FCA). The FCA’s interest in RegTech solutions dates back to late 2014, whereby it introduced Project Innovate. The idea behind this scheme was to facilitate a central hub for innovative start-ups to showcase their financial products and services, including that of RegTech.

Whilst regulatory bodies from other financial powerhouses continue to provide a framework & sandboxes for RegTech providers to evolve – notably, Australia, Singapore, Hong Kong and the United Arab Emirates – the U.S. appears to be lagging. One of the leading hindrances to an embracement of RegTech solutions is the somewhat fragmented overlay of the U.S.’s approach to financial regulation. Moreover, according to a recent report by Pew Trust, only one piece of legislation pertaining to a reduction in regulatory barriers to new products has been brought to the table. The Financial Services Innovation Act of 2016 did not reach a vote in Congress, nor has it been reintroduced since.

RegTech firms must understand that that their role far exceeds technological innovation:

When it comes to RegTech frims, they must make a contribution to the ecosystem that far exceeds the underlying technology itself. In order to spearhead the digital compliance solutions that they are looking to promote, RegTech firms must develop a key understanding of the fundamental needs of financial institutions, regulatory bodies and their advisors.

[Related: How RegTech will digitally transform Asset Management ]

One such example of a trans-national approach to collaboration is that of the Asia-Pacific RegTech Network, which includes founding members from Australia, Japan, Hong Kong, Singapore and Malaysia, among others.

Without a cross-jurisdictional and multi-stakeholder approach to RegTech-based compliance solutions, adoption rates will be hindered by the globalized nature of modern-day finance.

An additional stakeholder that is often overlooked in the RegTech ecosystem framework is that of professional service firms. By developing a better understanding as to the needs of financial institutions, requirements of regulatory bodies and the potentialities of RegTech solutions, professional service firms can bridge the ecosystem gap and help all parties.

This role is further enhanced through advisory support, keeping abreast of industry insights and managing the underlying risks associated with the integration of new RegTech technologies. These players must now step up.

In summary, if a RegTech eco-system is to thrive policy makers, public and private investment funds, innovation centres, professional services consultants, start ups and their ultimate customers must work together in an open and transparent manner.

Scalable innvoation does not happen in isolation. Industries do not grow unless clear strategies are put into place and nurturing environments are established.

If you want to develop a thriving eco-system you must establish the necessary framework and align all players. If you want market players to be more innovative, you need to demonstrate that they have the backing of regulatory authorities and policy makers. If you want to see true beneficial outomes, all players must commit to developing deeper and more meanginful relationships. With out planning and commitment none of this will take place.

Do you need assistance or support?

In addition to our award-winning solutions and services, we at Fenergo realise the need to foster greater colloboration to enable true digital transformation and regulatory compliance. Through the use of our community regulatory & design forums & our partner eco-system , we continue to innovate & develop mutualised solutions to enable real customer success. Furthermore we are continuously investing in how to transform client lifecyle management and enable digital transformation.

If you would like to speak to an expert about our community forums, digital transformation, onboarding, KYC, AML or any other regulatory area of concern, click here.

If you would like to access our latest market findings about digital transformation and customer experience, click here.

Further information & resources:

You may find the following LinkedIn pulses, blogs and digital resources to be of assistance:

• [LI Pulse] KYC & AML Challenges For Cryptocurrencies
• [Website] RegTech Insight - Digital platform for RegTech insights, papers and providers
• [Directory] The RegTech Directory - Online directory listing of the worlds' leading firms
• [Paper] Theres a Revolution coming - embracing regulatory technology - KPMG
• [Report] Global Regulatory Technology (RegTech) Market: Drivers, Restraints, Opportunities, Trends, and Forecast up to 2023