How is Regulatory Tech Related to the Future of the Financial Industry?

Posted by Adam Mendas on November 1st, 2021

Ragtech or also known as Regulatory Tech is a growing sector that aims to fuse technologies to meet regulatory requirements and is considered a subset of FinTechs. These regulatory technologies help in making financial activities more efficient and secure for consumers and help financial institutions improve their workflow.

By utilizing these new technologies, it is possible to improve and optimize a financial institution’s ability to comply with regulations such as KYC (Know Your Customer) and AML (Anti-Money Laundering) and automate the process as much as possible. Ragtech (Regulatory Tech) has the potential to improve financial institutions by ten folds, bringing in huge benefits for businesses and customers.

Primary Reason Behind Growth of Ragtech

In actuality, Ragtechs aren’t exactly new, but there have been several factors that are increasing the pressure on the financial service industry and other industry types to understand newer ways of doing business. When it comes to complying with ever-changing regulations, banks, credit unions, merchants, payment providers, and financial institutions always keep searching for better solutions. Some primary reasons behind the growth of Ragtech are:

• A Proliferation of Regulations

In the U.S, the financial sector itself has a couple of regulatory bodies including:

• Federal Reserve Board

• Federal Deposit Insurance Corporation

• Office of Comptroller of the Currency

• Office of Thrift Supervision

• Commodity Futures Trading Commission

• Financial Industry Regulatory Authority

• Securities and Exchange Commission and other regulatory bodies

Every single regulatory body builds its own set of rules regarding specific sectors of the financial industry. They can act independently from each other even though they may be working to accomplish the same goals, i.e. reducing financial fraud. Different regulatory bodies lead to reducing the flow of different types of financial fraud. 

• Rising Cost of Compliance

Most financial institutions fail to comply with regulations because they are ever-changing and keeping up with changes is extremely cost-consuming. To meet up with these compliances, companies have to invest huge amounts in personnel, tools, and other things to successfully manage compliance, reduce fraud and avoid fines. Using these technologies, financial institutions can update old compliance processes, update customer onboarding and customer reporting processes.

The cost of compliance has become so enormous that most businesses end up spending the better part of their annual budgets to comply with regulations. A study conducted by George Mason University reports that the buildup of regulation has slowed economic growth by 2%. As a matter of fact, financial institutions have to bear the cost of ,000 to onboard every new customer, depending on their risk rating and country’s regulations. 

• Avoiding Regulatory Fines

It’s a well-known fact that non-compliance with regulations leads to huge fines. The only way to avoid regulatory fines is to comply with regulations as much as possible. In October of 2019, the Financial Industry Regulatory Authority (FINRA) fined BNP Paribas million for not building an effective EDD (enhanced due diligence) program. An Enhanced Due Diligence program can detect suspicious penny stock and wire transfer activities that often result in money laundering. In 2018, FINRA fined Morgan Stanley a million as its AML program failed to meet the regulatory requirement of the BSA (Bank Secrecy Act). 

These are just a few examples of the total fines that have been imposed in the last decade. According to several reports, the total amount imposed in fines for non-compliance with KYC and AML regulations is equal to almost a billion in the last decade. 

How Ragtech Can Improve the Financial Industry?

To reduce the monetary burden as much as possible, businesses operating under the financial industry can employ Ragtech solutions. Ragtech contains several technologies and they address different types of regulatory needs. Some of these technologies are focused specifically on ensuring better compliance, especially cloud-based applications that can help in automating the internal compliance programs. 

Some technologies are focused on enhancing continuous transaction monitoring. These are the programs that do a real-time analysis of blockchain transactions and also keep track of customers behind these transactions. 

Other Ragtech firms are popping up around the industry and they help in regulatory reporting (technologies that extract data from scanned financial documents) and risk management (risk analytics tools that detect disruptive events in financial markets and anticipate price movements). 

Other solutions focus on enhancing digital ID management and control which is a major factor of KYC and AML compliance. One of the top examples is DIRO online KYC verification software which verifies online customer documents instantly to verify customer documents and ensure compliance throughout the organization.

Convergence of Ragtech and Identity Verification

In addition to the regulatory agencies, the financial industry also has to comply with customer ID verification regulations. KYC policies, for example, require businesses to have a certain level of “due diligence” to verify the identity of every customer and authenticate if they are who they claim to be. Here are the common regulations related to customer ID verification

• Customer Due Diligence (CDD)

• Know Your Customer (KYC)

• Anti-Money Laundering (AML)

• 5th and 6th EU Anti-Money Laundering Directive (AMLD5 & AMLD6)

• Children’s Online Privacy Protection Rule (COPPA)

• California Consumer Privacy Act (CCPA)

• Initial Coin Offerings (ICO)

• Payment Card Industry (PCI)

• Health Insurance Portability and Accountability Act (HIPAA)

Ragtech focused on online ID verification can enhance digital ID programs to successfully verify a customer identity using government-issued ID documents. Ragtech is continuing to improve and they will help financial institutions to comply with regulations, onboard new customers, reduce fraud, and avoid fraud and so much more.