Craig Dempsey is the CEO and Co-Founder of Biz Latin Hub, a firm that helps both local and foreign companies establish and operate their businesses successfully in Latin America through a full suite of back office services. Before becoming a business owner and entrepreneur, Craig served as an Australian military officer. He is a professional mechanical engineer and holds a Master’s Degree in Project Management from the University of New South Wales.
Since the 2008 financial crisis, the regulation of financial entities has increased significantly. In response, many financial firms have increased their compliance staff. However, the rapid pace of change in regulations makes it difficult for companies to rely on traditional methods to meet new standards cost-effectively. This is where regtech comes in. Regtech, or regulatory technology, is a subsection of the financial technology sector that helps financial institutions and corporations keep up with changing regulations and ensure proper reporting and compliance.
Regtech employs technologies like artificial intelligence, big data analytics, blockchain, and cloud-based services to help financial entities identify, interpret, and comply with new regulations, as well as increase transparency and manage risk. By automating complicated processes, companies can better monitor risk factors, reduce human error, cut costs, and react more quickly to the quick-shifting scene of financial regulation, giving them a significant competitive advantage.
For example, big data analytics allow financial institutions to optimize their data internally, providing valuable insights that can shape future predictions and strategies. Meanwhile, cloud services expand internal access to data and adaptability by decentralizing access to information and technology. In short, regtech can give companies a significant competitive advantage by reducing costs, improving flexibility, and increasing process efficiency.
The demand for regtech is on the rise worldwide. In 2017, global spending on regtech reached $10.7 billion, and that number is predicted to increase to $76 billion by 2022. Europe produced the highest volume of new regulations in the last five years, and as a result, became the leading regtech region. However, it’s worth noting regtech’s rise in other regions around the world, specifically in Latin America, where fintech activity is growing expeditiously.
Regtech on the rise in Latin America
Latin America has a rapidly growing fintech scene. According to the IADB, there are over 700 active fintech startups in the region, and that number continues to grow. An increased global focus on financial regulation has affected Latin America particularly, and its vulnerability makes it an ideal market for regtech solutions that target both established and developing financial entities.
Within Latin America, approximately 70% of the population is “unbanked,” or without a bank account, primarily due to a lack of trust in financial institutions and strong informal economies. In addition, complex and regularly-changing Know Your Customer (KYC) regulations create barriers to incorporating new clients and expanding access to formal financial services. New developments in regtech, however, offer solutions. Since 2014, the Global Legal Entity Identifier (LEI), a massive global database of contact information, has helped financial entities comply with KYC regulations by providing the required data without incurring the cost of obtaining and managing it.
Regulatory sandboxes are also picking up steam in Latin America. Sandboxes help fintechs mitigate risk and uncertainty by testing their innovations in a controlled environment and under the government’s oversight.
Though regtech in Latin America is still in its nascent stages, both the government and corporate sectors are pushing initiatives to facilitate regional regtech implementation.
Governmental regtech in Latin America
Mexico is undoubtedly leading the pack in terms of regtech in Latin America. In 2016, Mexico launched its “National Strategy for Financial Inclusion” to increase access to financial services amongst the lowest income tier. As part of this policy, the Mexican government adjusted their KYC requirements to make it easier to open new bank accounts. Now, depending on the calculated value and risk of the account, the requirements vary, with simpler requirements for low-risk and low-value accounts.
The Mexican Comisión Nacional Bancaria y de Valores (CNBV) is also leading regional regtech initiatives. The CNBV, which is responsible for monitoring and regulating Mexican financial entities, partnered with the Regtech for Regulators Accelerator (R2A) in 2017 to develop regtech solutions. In particular, they are focused on developing a new regulatory framework that will digitize compliance reporting, increase the quantity and quality of data, organize archival data, and improve data analysis. Finally, Mexico’s 2018 fintech law introduced a regulatory sandbox approach, allowing fintechs to innovate with new business models under special authorization provided by the Bank of Mexico, Banking and Securities Commission, and Insurance Commission.
Colombia has taken similar steps to promote local development of regtech. The Superintendencia Financiera de Colombia (SFC) is the Colombian government organization responsible for supervising and regulating all actors within the national financial system. In 2017, the SFC launched “Proyecto Regtech” as part of their Fintech division. The goal of the project was to promote the local development of regtech in collaboration with third parties, with a particular focus on technology that helps distribute and clarify information about regulation changes.
In Brazil, the Central Bank created a sandbox program, the Laboratory of Financial and Technological Innovation (LIFT), with the end goal of improving the financial credit system and increasing financial inclusion. Fintech companies participating in the program develop and test their products in a controlled environment, while also working with a regulator to calculate potential risks, understand the regulations in place, and determine how to meet those requirements.
Regtech is ready to grow in Latin America
Keeping up with regulatory changes is one of the biggest challenges companies in Latin America face. What’s more, the demand for real-time fraud detection and prevention of criminal activity continues to rise as more and more financial technology enters the market. Throughout the region, companies are exploring solutions that help them navigate these changes and cut compliance costs, most notably through partnerships with regtech solutions.
In Brazil, companies like OriginalMy and Idwall are focusing on fraud and identity verification. In Mexico, Avallo interprets and analyzes notarial deeds by cross-referencing them with public sources to help clarify legal requirements. Chilean Ceptinel has created tools to monitor and explain compliance processes. These are just a few examples of the many startups innovating in the regtech space. Although the fintech sector is still in its early stages in Latin America, there is evidence that its subsector, regtech, can usher in a new era of compliance powered by technology.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.