The 2008 global financial crisis represented a pivotal moment that separated prior phases of the development of financial technology (FinTech) and regulatory technology (RegTech) from the current paradigm. Today, FinTech has entered a phase of rapid development marked by the proliferation of startups and other new entrants, such as IT and ecommerce firms that have fragmented the financial services market. This new era presents fresh challenges for regulators and highlights why the evolution of FinTech necessitates a parallel development of RegTech. In particular, regulators must develop a robust new framework that promotes innovation and market confidence, aided by the use of regulatory "sandboxes." Certain RegTech developments today are highlighting the path toward another paradigm shift, which will be marked by a reconceptualization of the nature of financial regulation.
Today, FinTech has entered a phase of rapid development marked by the proliferation of startups and other new entrants, such as IT and ecommerce firms that have fragmented the financial services market. This new era presents fresh challenges for regulators and highlights why the evolution of FinTech necessitates a parallel development of RegTech. In particular, regulators must develop a robust new framework that promotes innovation and market confidence, aided by the use of regulatory "sandboxes."
The startups creating the future of RegTech and financial services
Regulatory and technological developments are changing the nature of financial markets, services, and institutions in ways completely unexpected before the 2008 global financial crisis (GFC). Financial technology, or FinTech, refers to the use of technology to deliver financial solutions.
The second stage, FinTech 2.0, encompasses the pre-GFC period underpinned by the digitization of traditional financial services, beginning with the first ATM and culminating in e-banking. Since the GFC, the rapidity of technological development and the proliferation of startups and IT firms providing financial services have characterized the era of FinTech 3.0.
FinTech is not a new concept. The term FinTech can be traced to the early 1990s8 and now refers to a rapidly developing evolutionary process across financial services.9 This trend only began to attract the attention of regulators,10 industry participants, consumers, and academics in 2014, as illustrated in Figure 1.
The evolution of FinTech has unfolded in three stages, summarized in Table 1. The first, which we call FinTech 1.0, occurred from 1866 to 1967, when the financial services industry remained largely analogue despite being heavily interlinked with technology. The next period, FinTech 2.0, extended from 1968 to 2008, an era characterized by the development of digital technology for communications and transactions and thus the growing digitization of finance. Since 2009, in the period we call FinTech 3.0, new startups and established technology, ecommerce, and social media companies have begun to deliver financial products and services directly to the public as well as to businesses, including banks.11
The key differentiating factors of FinTech 3.0 are the rapid rate of technology development and the changing identity of the providers of financial services. Startups and technology firms have challenged established financial institutions by offering specific, niche services to consumers, businesses, and incumbent financial institutions.
Adding to rising costs is the increasing fragmentation of the regulatory landscape. Despite attempts to establish similar post-crisis reforms, different markets can have substantially different rules for implementing those reforms. Regulatory overlaps and contradictions are not uncommon, and financial institutions have, unsurprisingly, looked to RegTech to optimize their compliance management.45 The constantly evolving regulatory landscape has also introduced uncertainty regarding future regulatory requirements, prompting financial institutions to invest in improving their own adaptability.
The FCA has limited access to its regulatory sandbox to a certain number of applicants with a detailed testing plan for a certain duration.70 Successful applicants will need to demonstrate that they have a genuinely innovative solution that (1) requires sandbox testing, (2) is intended to support the financial services industry, and (3) offers consumers a clearly identifiable benefit. For firms operating in this space, the sandbox presents a unique and valuable opportunity to test innovations more efficiently by temporarily circumventing ordinary licensing obligations. Access to the sandbox will occur in phases.71
Regulatory sandboxes are shaping up to be fundamental to the development of new regulatory approaches. The fragmentation of the financial services industry and the pace of innovation support the use of sandboxes, which may be used not only for the trial of novel products generated by industry but also for the testing of new and more flexible approaches by regulators.
RegTech offers benefits to both industry and regulators. For industry, it can empower financial institutions to control costs and risks more effectively, liberate surplus regulatory capital,81 and present new opportunities for FinTech startups, advisory firms, and tech companies.82 For regulators, it allows the development of continuous-monitoring tools to identify problems as they develop and reduce the time it takes to investigate compliance breaches;83 it also fosters the development of simulation systems and sandboxes, which can identify the likely consequences of proposed reforms and new approaches.
With the pandemic accelerating digitalization globally, the evolving wave of cybercrime, data privacy challenges, and shifting compliance needs, financial institutions are increasingly embracing specialized tech to meet regulatory requirements. The ever-changing regulatory landscape for financial institutions has provided an opportunity for innovators to establish new regtech startups to support financial institutions with compliance.
Because of the changing landscape and increasing threats, organizations will have to put more effort into vetting the third parties they work with, shielding themselves from potential risks through third-party partners. However, we believe these five regtech startups offer unique solutions for financial institutions and can help reshape the future of fintech.
Paragon Data Labs is a next-generation regtech startup that develops cloud-based enterprise software solutions to streamline critical operations for financial services firms. Their flagship Compliance Administration and Tracking (CAT) platform is a cloud-based enterprise software to streamline employee compliance for financial services firms. CAT integrates Personal Trading Oversight, Employee Disclosures, and Material Non-Public Information Management for automated monitoring and robust firm-wide analysis and visualizations. CAT makes employee compliance easy for the employer and employee.
Apiax is a Swiss regtech startup that builds and offers tools that transform complex financial regulations into digital compliance rules, which are constantly up-to-date, verified, and accessible via an API. A pioneer of digital compliance, Apiax allows financial institutions to comply with global regulations more efficiently and is perfectly suited for the open banking and API economy.
Ultimately, the digital transformation has presented several new opportunities to help reshape the finance industry. While there are concerns of cybercrime, digital privacy, and shifting compliance needs, several regtech startups have already created solutions to alleviate these challenges and create a safer digital future for everyone.
This page contains public general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This information is not comprehensive nor all-encompassing and has been compiled by Deloitte on a best endeavours basis, it is therefore subject to change at any time. The information in this website is not legally binding, does not constitute any advice or recommendation and is provided for information purposes only.
I first stumbled across the term RegTech as a buzzword back in late 2015 whilst working in Singapore during a FinTech meet-up event. Regulation in the financial services industry has been around a long time but the focus on this as an area has really developed pace for a while now. There are plenty of start-ups who are developing some quite clever solutions and working exclusively with a number of the global banks.
We call this phase RegTech 1.0. We estimate that over 300 RegTech firms were launched up till 2016. Banks, just after the economic crisis, were facing huge compliance costs, a new set of regulations, the proliferation of startups in financial services and the need to innovate quickly. Regulators were also looking for ways to support a more efficient implementation of regulations and supported the technological innovations by RegTechs.
While many use cases have been popular in regulated industries like financial services and health care, the benefits of these emerging technologies have been limited due to a lack of meaningful evolution in transcription techniques. For example, global regulatory mandates to record telephone conversations in financial institutions have proliferated since the 2008 crisis, but supervision of these communications presents challenges because transcription technology has remained stagnant. Similar attempts to use voice-to-text solutions to pre-review advertising and marketing materials have proven difficult, given the rudimentary nature of available applications.
To meet the need for better and more efficient regulation of businesses, especially for financial firms, an emerging crop of regulatory technology startups are building tools aimed at helping companies improve compliance, mitigate risk, and streamline processes. 2ff7e9595c
Comments