The finance industry has been flourishing since the past few years. It has majorly focused on the back-end processes along with customer services. These domains have played a major role in the regulators shifting their attention towards data compliance. Due to this, RegTech has also been growing at a significant pace over the years. In pre-pandemic times, technology had already marked its presence in these sectors. However, the pandemic came as a driving force and accelerated the process of technology adoption. Hence, financial institutions especially RegTech companies now depend on technology to carry out their operations.
Technology adoption in RegTech
RegTech helps in augmenting the compliance aspect of the financial institutions. It uses FinTech products and technology to digitize and simplify the compliance process. With the rise in digital adoption, there has been an increase in cybercrime as well. The cases of data breaches, cyber hacking, money laundering along with other financial frauds are hitting an all-time high. Using big data, machine learning, blockchain, and AI, RegTech firms help reduce the risk to a company’s compliance and provide data on money laundering activities conducted online. They do so since the compliance team may not have an access to such private information. They ease out regulatory and compliance activities and also help in reducing heavy penalties.
RegTech companies primarily use cloud computing technology through software as a service (SaaS) to help businesses comply with regulations in a cost-effective manner. They usually cater to the needs of regulatory reporting, risk management, identity management, control and compliance, and transaction monitoring. In the present times, both financial institutions and regulators use RegTech to deal with complex compliance processes.
Role of Artificial Intelligence in compliance
Artificial Intelligence plays an important role in simplifying the compliance process and increasing the productivity of the institutions. It also enables knowledge cross-pollination amongst the members and concerned parties.
Artificial Intelligence in RegTech
There have been various debates whether Artificial Intelligence in RegTech is a problem solver or a disruptor. The industry players however have not been able to come up with an answer yet. But it is an undeniable fact that utilizing the power of technology has indeed become the need of the hour to track and detect financial frauds.
AI as a problem solver
Yes, technological adoption is increasing and it will impact the financial industry in the future. Artificial intelligence, predictive analysis, or machine learning, IoT, chatbots, etc. have already started occupying a place in the finance industry and RegTech organizations. However, it is essential to leverage the potential of these technologies optimally and efficiently to prevent regulatory and compliance issues.
RegTech firms need to be transparent and simple since they handle the collection and management of the bulk of data. Artificial Intelligence will help RegTech in the same. It has already been introduced in the customer service space where bots help reduce manual labor and improve accuracy. But AI can also be used for self-learning crisis management strategies as these would prepare regulatory firms for uncertain events. These unpredictable situations could be cyber crisis, financial fraud, or even natural disasters. Deploying AI would also help save the involved money.
Various institutions have already started creating databases with common queries of customers related to regulatory procedures and compliance. A prominent example of this is AI-enabled FAQ bots that resolve the queries in real-time on trade and help in the reduction of the overall turnaround time on trade lifecycles which could directly impact the overall market liquidity.
With the help of technology, RegTech can automate basic processes like due diligence, data collection, management, and analysis. AI will indeed play a major role in upscaling the sector and will help the financial industry smoothly manage the bulk of data in the complex world. It is changing the core nature and structure of the financial industry and will help bring about major transformations in the sector.
AI as a disruptor
However, what we can’t ignore is the fact that financial institutions are becoming dependent on technology. AI will help automate the financial sector and bring about fundamental changes in the operations of the financial industry and RegTech firms. But it also comes with associated risks. The primary one is that there is no validity if Artificial Intelligence can help detect frauds and even if it does, how accurate will that be.
Future of RegTech
As per Expert Market Research, the global regtech market stood at $6.5 billion in 2020 and it is expected to grow at a CAGR of 42% and hit the $53.2 billion mark by the end of 2026. This statistic shows that RegTech will eventually soar in the coming times. The adoption of technological solutions will be one of the major reasons for this growth.
A recent report by Deloitte, RegTech Universe in 2021, points out a similar trend. It states that RegTech will modify the regulatory scenario positively by providing tech-savvy solutions. This will be done to meet the increasing and changing demands of compliance within the financial industry.
The regulations process will require the deployment of artificial intelligence. However, it will also need human guidance and assistance to understand and learn the regulatory language.
On the whole, RegTech is growing and on the path of digitization. The demand for a simplified and easy compliance process in financial institutions is rising. And AI will play a major role in fulfilling the same. In the times ahead, it will step in as a problem solver for RegTech firms and financial institutions.