Financial technology, also known as FinTech, has changed the lives of billions by making financial services and products more accessible, and even integral, to their daily lives. For example, FinTech is what makes it possible for payments to be processed quickly across the globe for low fees, or for individuals to buy and sell online securities directly in the stock market without the advice of intermediaries. As an additional example, the sharing economy—the market for consumption of unused assets, facilitated by social media—is often powered by FinTech companies as well.
In light of the dramatic success of FinTech, the media, the private sector, and regulators have begun to focus their attention on understanding how to apply technology to regulate the financial sector, a field known as Regulation Technology, or simply RegTech. In fact, the global RegTech Market revenue is expected to reach $7.2 billion by 2023. The rise in the profitability of RegTech is primarily the result of the post-2008 financial world of increased government regulation, where compliance is a key governance function, and risk management is a critical regulatory strategy. RegTech tools have helped solve industry needs in a more effective and efficient way, automating corporate governance and compliance processes. RegTech solutions ensure that companies are up to date with the latest regulatory changes, minimize the likelihood of human error, and increase the overall governance process, while providing innovative risk management and cybersecurity tools. Among those are also the popular Bug Bounty programs, which invite people to hack into entities’ systems in order to find flaws in exchange for rewards. Although those programs initially were spearheaded by, and mainly relevant in, the private sector, the public sector has started to show interest too, with the House recently passing the Hack Your State Department Act to establish a State Department bug bounty program.
RegTech is extremely helpful. Photocredit: GettyGETTY
RegTech is the answer to a real need. Learning, interpreting and complying with voluminous regulation requires the financial services industry to spend great resources. And RegTech has the promise of making that process more efficient and cost-effective. That potential has caused the invasion of entrepreneurs and innovators into the complicated world of RegTech, with some relying on the same technologies that fueled FinTech’s disruption of the financial services industry, namely, machine learning, biometrics and big data. Just as the private sector is looking to RegTech to help with compliance, so too regulators are looking to RegTech to help with monitoring and enforcement. Regulators also hope that the increased use of technology within the financial services industry will give them the ability to more efficiently access and assess massive volumes of information that must be monitored and evaluated.
But despite its advantages, RegTech is not the solution to all corporate governance and risk management issues. First, it is not easily accessible—the significant barriers to access of RegTech include financial resources, access to data and talented manpower. Second, although RegTech certainly increases automation and efficiency in compliance for the businesses implementing it, regulators use some of the same tools to increase their efficiency, allowing them to continually increase the regulatory requirements they impose. Thus, RegTech’s automation and efficiency gains may be offset by the costs of expanded regulatory requirements. So, the end result of using RegTech might not necessarily be financially profitable. Third, partnering with third party vendors can increase risk, as they might not be familiar with the same level of risks and dangers, particularly, because much of the work and risks are outsourced to third parties at the end of the day. Fourth, technology in governance and risk management decision processes uses opaque and often biased programmed reasoning and altered interpretations of the law, which can hinder good human judgment. This means that lawyers explain to programmers what needs to be coded into RegTech algorithms and tools, and the programmers create binary technological solutions to cover all possible scenarios based on their interpretation of the legal requirements. And, last but certainly not least, RegTech alone cannot extirpate undesired and unethical business practices, incentives, or culture. Moreover, just as technology can be used for good, it also can be used by businesses to evade regulations and frustrate regulators, a phenomenon referred to as anti-RegTech.
Despite its advantages, RegTech is not the solution to all issues. Photocredit: GettyGETTY