Regtech changes the finance industry by fostering compliance

regtech, the venture magazineIn an era when smartphones enable us to learn or buy just about anything at the touch of a button, and data breaches are a regular occurrence, security is paramount. Innovations such as open banking and the New Payments Platform give consumers more power and freedom in financial transactions. With new technology come new rules, and with the speed at which innovation comes, regulations need to keep up. So, with the proliferation of fintech inevitably comes the rise of regulatory technology: regtech.

Neo banks set the tone

regtech, the venture magazineThe Big Four — National Australian Bank, Commonwealth Bank, ANZ, and Westpac — handle about 95 per cent of banking business in Australia, but digital neo banks are popping up left and right in response to a perceived inflexibility in the legacy systems established banks use to perform credit checks. FrankieFinancial was one of those before realising that its financial services software — which puts several background check sources such as VixVerify, Experian, and Mogo into a single platform — was its killer app. Thus, a regtech pioneer was born, and Frankie recently struck deals with neo banks Xinja and Novatti Group to provide quick and easy approvals.

“The rise of neobanks in Australia has been led by consumers’ dissatisfaction of banks being unable to do seemingly basic tasks. Customers who apply for credit cards or mortgages are often frustrated when the bank asks for a 100-point check and statements even when they’ve been a customer for 15-plus years,” Frankie CEO Simon Costello said. “It’s not that banks aren’t aware of these inefficiencies or poor customer experience; it’s that they’re hamstrung by legacy systems that don’t communicate well, store data in silos and are expensive to maintain. According to Ripple Insights, globally, 70 per cent of banks’ IT budgets are spent on maintaining legacy systems.”

Regtech companies such as Frankie are disrupting the traditional way of doing business, helping startup banks get an edge and looking to help established players upgrade their old systems.

Widespread Adoption Coming

regtech, the venture magazineWhilst early stage companies and smaller businesses are the first to adopt regtech, it’s in prime position to go mainstream. The Royal Commission into misconduct in the banking, superannuation, and financial services industry has led to tighter lending restrictions and found that the financial sector has “fallen below community standards and expectations.”

With its ability to not only facilitate compliance but actually predict potential data breaches, regtech is a way to win back the public trust and make digital transactions more secure. Australian Securities and Investments Commission (ASIC) commissioner John Price said “regtech should be top of mind for both regulators and industry. The reason for this is simple — the regtech sector has enormous potential to help organisations build a culture of compliance, identify learning opportunities and save time and money relating to regulatory matters while improving compliance and — most importantly — outcomes for consumers. It also has potential to support ASIC and our regulatory peers in the way we undertake our own work.”

ASIC executive director Michael Saadat is encouraging banks to adopt regtech. “I don’t think we would say: ‘You must use a particular type of technology,’ but it will probably reach the point where if you aren’t using a type of technology, you have some explaining to do,” Saadat said in March.

Other Applications

regtech, the venture magazineThus far, regtech has focussed on helping banks protect consumers. The flip side is helping banks determine whether potential customers are worth the risk. Using predictive machine learning, regtech has the potential to sort out which loan applicants are likely to repay on time, detect fraud, and assess the likelihood of the customer doing business with the bank as opposed to shopping around. This can all save banks time, effort, and in the end money by sifting through thousands of applications and targeting the customers who will form mutually beneficial, lasting relationships with the institution.

To help companies remain compliant whilst growing, and to promote companies that specialise in the technology that makes compliance easy, the RegTech Association facilitates collaboration between government agencies, regulators, regulated entities, and regtech startups with conferences and trainings. In May, Prime Minister Scott Morrison announced the creation of Services Australia, a digital services agency focussed on “driving the better use of information technology and apps that can assist Australians to better access the services they need.”

The big four banks are expected to spend $2.4 billion on compliance over the next three years. ASIC will be using AI to screen insurance sales calls to make sure the agents are meeting disclosure requirements and not using “hard sell” tactics. Daisee will employ its speech analytics software to do the same for Westpac’s call centre. As rapid technological advancement continues to collide with preserving the public trust, regtech will become an integral part of doing business.