Global State of FinTech Report

RegTech Report 2018

Executive Summary
INSIDE THIS ISSUE:
RegTech: A Triple Bottom Line Opportunity

MEDICI Signature Report | Vol: 3 I Q2 2018

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RegTech: A Triple Bottom Line Opportunity

#1 RegTech Offers Measurable and Strategic ROI

Use of RegTech solutions results in savings through multiple avenues, while imparting a strategic edge

RegTech Unlocks Resources for Innovation

#2 The saved resources can be used for customer centric innovations, creating a higher visibility for the
digital centricity of the financial institution

RegTech Unleashes FinTech-Centric

#3 Transformation
Use of RegTech solutions creates the base for smooth integration of other FinTech solutions, and
enables ongoing development of compliant FinTech products

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Report
Overview For

This report provides a deep dive analysis of Regulatory Technology or RegTech, a critical segment of innovation in the
financial services industry. We explore the increasing need for technologically enabled solutions in an environment
of rapidly growing body of regulations governing bank activity and increased costs of compliance.

We look at the benefits of RegTech beyond simply cost savings, the specific problem areas and challenges involved in
implementing these solutions. As always, we are focused on approaches that work in the real world at banks who
are looking to accelerate their digital transformation for better customer experiences and growth in shareholder
value.

The qualitative and quantitative findings and insights were curated by MEDICI experts to present a comprehensive
view of the RegTech landscape pertaining to the financial services industry.

The research was refined through MEDICI experts’ segment and ecosystem insights that have been developed
through many years of tracking the developments in the space and bringing together the overall ecosystem.

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 MEDICI RegTech Report 2018: Executive Summary
1. The Growing Need for RegTech 4. Benefits of RegTech Solutions 7. Current Trends & Key Use Cases
Heaps of rule-changes, growing compliance costs Efficiency gains on multiple fronts Addressing the gamut of regulatory needs
and narrowing margin for error From cost-restructuring to capital leverage, Regulatory reporting, compliance, data management,
Post-GFC, the regulatory activity has been growing reduced risk-levels to enhanced supervision, fraud monitoring & control, risk management, digital
with a 500% increase in regulatory changes in the non-invasive implementation to a granular view identity, governance, e-KYC/AML/CFT – RegTech
developed markets. The cost of compliance continues of insights into the risk data pools – RegTech covers the entire spectrum of governance, risk, and
to increase, and also the misconduct fines. While the solutions bring an array of benefits to the table. compliance at the organizational level.
existing compliance practices are increasingly proving
to be ineffective, banks are gradually realizing the
5. Roadblocks to RegTech Adoption
burning need to adopt emerging technologies as part 8. SupTech as a Breakout Segment
of an evolving compliance strategy. RegTech has Business silos, data quality & dearth of talent
emerged as the need of the hour. Disparity of data management and security norms Regulators joining the tech bandwagon
across jurisdictions present a big challenge for In collaboration with RegTech players, regulators are
RegTech providers to scale up. In addition, silos of increasingly using technology to digitize data,
2. The Problem Statements disconnected business functions, scarcity of talent, streamline their operational procedures and
Grey areas in the existing compliance functions and a cost-driven myopic view of change are some of automate the regulatory reporting and collection
From silos of unstructured data, inefficient processes, the major roadblocks for RegTech implementation. process, while also driving broad-based innovation
inadequate analytical capabilities, & incompatibility of in policy making and regulatory strategy.
meta data to poor interpretation of rule changes & lack of
standardization in data management – there are several 6. Clearing the Hurdles 9.RegTech Adoption Strategy
problem areas that need a RegTech makeover.
Standardization and collaboration are key A framework-driven approach for banks
There is a growing need for industry-wide Financial institutions have an array of options for
3. Enabling Technologies standardization efforts, consolidation of modular choosing the right RegTech partner for their
Making the real-time possible offerings, and a top-down push from the regulators. comprehensive needs. However, the road to
Regulatory engagement initiatives such as sandboxes RegTech implementation needs a well-crafted,
A convergence of disruptive enabling technologies is coming
and innovation hubs will foster innovation and drive forward looking strategy. To measure the true
together across big data, blockchain, biometrics, and
adoption. A collaborative, ecosystem approach will impact of RegTech, banks and FIs need to reflect on
cryptography that is allowing secure enhanced integration of
provide the much needed solutions to address these the non-monetary benefits (operational and
previously disparate systems.
industry-wide challenges. strategic), which deliver even larger ROI and impact.

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 The Need for RegTech
Narrowing margin for error in compliance

The cost of compliance and Globally, banks are now shelling Regulators, especially in US and UK, While large banks have the capital
misconduct has made a serious dent out in excess of $270 billion per are becoming stricter. to bear the cost of compliance (and
in banks’ profitability, as they need year on compliance and An estimate indicates that fines pay hefty fines for non-
to expand their compliance head- regulatory obligations. Large US levied on banks by US and UK compliance), smaller banks find it
counts to tackle the regulatory and European banks are spending regulators will top $400 billion by even more challenging with
expectations. Compliance puts as much as $20 billion a year on 2020. There is almost no margin for limited capital. Growing costs and
additional and necessary onus on technology to help them comply error as regulators are not hesitant to hefty fines can pose serious
banks to transform their existing with the newly evolving impose huge penalties for non- hurdles to the very sustainability of
systems. regulations such as MiFID and compliance and misconduct. their businesses.
PSD2.

Regulators are growing less tolerant to instances of misconduct and are increasingly penalizing financial institutions
for non-compliance.

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 Key Problem Statements
Data management at the center of compliance challenges

The modern financial services industry, largely data-driven, faces challenges originating from poor data governance.

3 Vs High Velocity
of Large Variety
Data Intensity Big Volumes

Raise concerns
Banks have been sitting on a Newer data-driven FinTech The increased intensity of data about
pool of customer data without models, which banks are trying to flow is adding another degree
having been able to effectively adopt, have now mobilized these of complexity in data • Data protection & privacy
use it. data pools, resulting in greater management. • Cybersecurity
inflow/outflow through increased • Data management
data sharing among functions for • Consent tracking during data
analytical purposes. sharing

Banks and FIs need to strengthen their data management functions in a bid to enhance operational efficiency and stay compliant.

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Enabling Tech Behind RegTech

A convergence of disruptive technologies
Regulatory reporting is essentially a data issue, with banks spending huge amounts of money on data collection,
aggregation, and the actual reporting. Due to the multiple data processing steps and fragmented systems,
several manual interventions are required in terms of adjustments and reconciliations. This is where big
data analytics, machine learning and the consequent process automation & consolidation
they bring about can drive a significant amount of cost reduction.
Arun Iyer | Executive Vice President, Hexanika

Big Data Analytics RPA/IPA AI/ML/NLP Blockchain and DLT

• Programmable reporting • Reduces time to insight • Machine intelligence in • Shared ledger for a central AML/KYC
• Data visualization • Enables productivity and efficiency regulatory tracking & reporting repository for regulators & FIs
• Gathering insights from gains by automating non-value- • Real-time fraud monitoring & driving efficiency gains
structured as well as added human activities risk profiling • Sharing of cost-burden for KYC/AML
unstructured data pools/lakes • Reduces human error quotient • Assisted intelligence driving directives among partner FIs
• Modern data visualization • Reduces people cost down false positives • Immutable record of transactions
techniques for interpretation • Enables redeployment of freed-up • NLP & visual analytics for ID enabling a traceable audit trail
resources for more productive verification (KYC)
purposes

Advanced technologies make the real-time possible.

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Enabling Tech Behind RegTech

A convergence of disruptive technologies
The actual growth and true usage of AI is less
than 5% of its potential, but it is growing, and
people are becoming increasingly aware.
Srini Mannava | Founder, Infobelt LLC

APIs Cloud Computing Biometrics Cryptography

• Enhance integration of disparate • Standardized and common data • Facial recognition, IRIS scan, and • Enables secure, faster, efficient, and
compliance functions across storage fingerprints for KYC more effective data sharing within
departments • Common pool of key compliance authentication financial institutions for data
• Allow for Plug-and-play functions on a single platform, • Aadhaar in India is a live example aggregation
integration of modern enabling efficiency gains of a biometric-based identity • Drives efficiency in risk data
technology solutions to FIs’ core • Enables scaling-up the operations of pool, enabling eKYC and easier aggregation processes
systems compliance functions in a timely, onboarding • Other impact areas include data sharing
• Enable automated reporting of cost-effective manner • Profile creation for fraud with other financial institutions, clients,
data to regulators through data • Most RegTechs are cloud-native. prevention regulators, and FinTech solution
democratization providers

The back-end innovation by RegTech plays a crucial role in driving the front-end innovation of FinTech.

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The Benefits of RegTech
Efficiency gains on multiple fronts

Variable, performance- By making compliance less Reduction in cost of hiring A more competitive Improved quality and
based modular cost complex and capacity- expensive compliance talent industry with fewer / lower efficiency of supervision,
structure as against demanding, RegTech solutions pool by outsourcing key barriers to entry thus reducing systemic risk
upfront capital cost on could free up capital for more functions
untested technologies productive uses.

Lower cost of technology Enhanced efficiency, Non-invasive End-to-end data

Programmable, API-
solutions, including the capacity, and speed of implementations management with a
driven actionable insights
benefit of cheaper cloud- compliance eliminating the need to granular view of insights
for compliance
based services upgrade legacy systems

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The Road To RegTech

Major challenges in RegTech implementation

Scarcity of Talent Silos of Disconnected Functions

Banks as well as regulators find it difficult to find people with relevant technology
Multiple disconnected banking functions are not usually coherent in terms
skillsets, as well as deep domain-specific knowledge of regulations. Since RegTech
of innovation. RegTech implementation needs a collaborative effort
deals with both these aspects, hiring suitable resources becomes one of the most
between various departments in a financial institution, such as the
challenging aspects of RegTech implementation.
compliance, technology, and legal departments. A lack of coherance
between the innovation efforts in these silos often creates challenges.

Revenue-Based Approach Hindering Scale Scalability Across Functions & Jurisdictions

Banks tend to focus on revenue generating activities for major technology The modular, point solutions offered by RegTech providers are often difficult to
updates. As compliance is essentially a cost function, the related tech updates scale across various departments of an FI. For multi-national organizations, this
get relegated to a lower priority level. Banks are thus apprehensive about challenge gets compounded with the need to comply with regulations across
scaling up RegTech across their entire compliance function. They also multiple geographies.
sometimes fail to acknowledge the efficiencies RegTech can bring to their
routine non-regulatory processes of data management.
Sustainability of RegTech Startups
Financial institutions have apprehensions about the sustainability and
financial stability of RegTech startups, and thus there are uncertainties in
the long-term service availability and upgrades when implementing a
RegTech solution.

The road to RegTech implementation is often laced with costs of transition, cynicism, and a myopic view of change.

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The Road To RegTech

Major challenges in RegTech implementation

Long Decisioning Cycles High Cost of Implementing Untested Technologies

Banks’ IT procurement tends to have long hierarchal decisioning cycles, RegTech implementation needs greater focus on some specific technologies such as
with senior stakeholder buy-in required for RegTech implementation. AI/ML, RPA, etc. These are often untested applications with high-cost PoCs. This
feeds into a short-term ‘trial and error’ approach rather than a dedicated RegTech
implementation roadmap in place.

Change Management
Adopting RegTech often involves a modern approach, comprehensive change
Interation & Standardization Challenges
management and transformation efforts at an organizational level, which Though most RegTech solutions are capable of reading data from banks’ legacy
makes its implementation complicated. systems, the lack of standardization limits their capability for seamless integration
with other newly implemented third-party or in-house applications.

Capabilities vs. Credibility

Training & Upskilling Costs
While RegTech does promise new ideas and technology capabilities,
financial institutions seek clear demonstration of RegTech’s credibility in A RegTech implementation requires specific upskilling for banks’ compliance
making a meaningful impact. functions, which adds both cost and strategic effort.

The road to RegTech implementation is often laced with unavoidable costs of transition, cynicism, and a myopic view of change.

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 RegTech Adoption
Solutions to known challenges

FIs will benefit from a coordinated Automated, secure online data A top-down push from the regulators, Consolidation of modular offerings
industry-wide design effort to set transfer mechanisms at the regulators’ highlighting the credibility of select by RegTech startups in every
clear standards for RegTech in the end without file size limitations could RegTech startups through FinServ segment will present a
product development phase. With a significantly increase reporting accelerators and sandboxes, will comprehensive solution to the
standardized range of offerings, efficiency for both regulators and FIs, reassure banks and drive them to banks, enabling them to have a
RegTech can offer plug-and-play thus significantly easing the reporting consider RegTech solutions as a holistic view of an end-to-end
interoperable modular solutions process. viable opportunity. compliance transformation.
which will enable banks to
customize final deployments to
their needs.

A collaborative, ecosystem approach will deliver the necessary solutions for RegTech challenges.

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RegTech Use Cases
Major areas of application

Regulatory Reporting Compliance Governance e-KYC/AML/CFT

• End-to-end automated reporting solution • Regulatory intelligence: Identifying and keeping • Internal control and accountability • ID/document verification
• Auto-updates based on changing track of regulatory changes for risk data • Digitized due dilligence and
compliance needs • Machine-readable regulations and alerts on non- • Enhance board‘s effectiveness in onboarding
• Customizable, configurable document compliance compliance assessment • Transaction monitoring and
generation and submission in a • Policy mapping and auditing • Optimal integration, visualization authentication-based AML checks
standardized format and consolidation of dashboards
• Policy and procedure management

Data Management Fraud Monitoring & Control Digital Identity Risk Management
• Risk data cleansing and aggregation • End-to-end integrity validation • Digital trust and multifactor • Risk data generation & aggregation
• Data discovery and classification • Anti-fraud and market abuse identification authentication • Stress testing
• Data provenance and algorithmic systems • Cryptographic digital signature • Internal risk reporting
transparency • Back-office automation (post-transaction • Digital locker, storage and encrypted • Forecating and scenario analysis
• Reducing data silos and improving settlement, closing procedures) documents
• Alert generation and automated triggers
workflow • Trade surveillance and conduct monitoring
• Dynamic data minimization

RegTech covers the entire spectrum of governance, risk, and compliance at the organizational level.

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 Decisioning Parameters for RegTech Partner Selection
Choosing the right fit for an FI’s needs

A comprehensive range of Plug-and-play Uniqueness of their

Scalability across
solutions catering to the integration solution and its fit with
geographies and
entire gamut of their technologies such as the needs of bank/FI
jurisdictions
regulatory needs APIs

Alignment with the Deep understanding of FI’s Stability and

bank/FI’s technological business and the complex risk, sustainability of the
roadmap, and regulatory, and compliance startup and its solution
compatibility with existing challenges associated with its
systems processes

Financial institutions have an array of options for choosing the right RegTech partner
based on their modular and comprehensive needs.

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Contact Us Aditya Khurjekar
CEO & Founder
Amit Goel
CIO & Founder
For further information about MEDICI and our ak@goMEDICI.com amit@goMEDICI.com
membership options, please contact:
@khurjekar @ amitTwitr

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