Is regtech the new fintech?

Aremarkably inefficient but critical activity in the financial services and insurance industry is the Know-Your-Customer (KYC) process. It is an area of enormous investment in fragmented processes. At any given point of time, the personal and corporate information of individual and enterprise customers is being collected, validated and monitored by different financial and fintech agencies. Often looking at the same data but with different processes and interpretations.

But what exactly is the KYC process and why is it important? For the people outside the world of financial services and in fact for many within that world, KYC seems like jargon. And even for many who understand the acronym, it represents a mandatory and cumbersome tick-box in the process of opening accounts. There are usually four aspects to KYC.

One area relates to another industry term — AML, or antimoney laundering. Essentially, it is a procedure to follow to mitigate the possibility that the customer is not trying to convert money from illegal activities into legally valid tender. The customers’ (enterprise or individual) names and details are checked against a global set of databases. This is a cumbersome process and is by nature not precise, requiring intelligent intervention and rules to mitigate the challenges of incorrect identification.

Another area relates to checking if the transaction or the customer has links to terrorism and related activity. This is also an area that requires processes to check against global databases on entities and individuals that are under surveillance or sanctioned. Again this area requires intelligent interpretation based on operationally intensive cross-checking work.

Related to this area is the checking of customers and enterprises linked to countries that are sanctioned for a variety of reasons. This is again highly intensive, sensitive and requires a high level of intelligent and consistent interpretation.

A third area relates to the creditworthiness and general soundness of the customer that is applying for facilities from the financial institution. Ensuring that the data sources are accurate and that this data is being well interpreted is a matter of deep concern for the general well-being of the financial services industry. A fourth area relates to marketing and getting enough information about the customer to be able to understand customer needs and to target the appropriate products with the least level of cost-of-conversion. As is the case with the three other areas, this again requires analytic capabilities. From multiple internal and external sources. Again the level of human intervention required is very high.

Overall, the KYC business is a super set of the regulatory and compliance requirements that constitute the first two and part of the third areas described so far.

Regtech is a blend word of ‘regulatory technology’ that was created to address regulatory challenges in the financial services sector through innovative technology. Let’s Talk Payments (LTP) provided some interesting numbers relating to the size of the opportunity. As per their A Report on Global Regtech dated April 18, 2016, since the recession in the US banking industry, financial institutions there had paid out more than $160 billion as fines, penalties and settlements for non-compliance of regulations. The London-based HSBC had apparently spent $2.2 billion on regulation and compliance in the first nine months of 2015, an increase of 33 per cent over the previous year. According to the report the global demand for regulatory and compliance related technology will top $118.7 billion.

Investments in reducing costs in this area can reap estimated return on investments (ROIs) of 600 per cent plus. This space is attracting the best of talent from the consulting and banking industry. Next week, this column will feature one such company which is making waves in Europe and here. Regtech has rapidly become of the key drivers of fintech, with its enormous capability to make more accurate predictions based on sophisticated algorithms. The by-product of better marketing capability means that banks and fintechs can become leaner and better at what they do. What was once seen as a necessary but cumbersome and in some cases unexciting area is now getting transformed.

For marketing and sales staff, the benefit of technology is enormous. As a practice, people in the customer-facing domain were often tasked with data-collection, which is typically not suited their orientation. It certainly is not linked to their core objective which is to grow business. The reason for the pressure on front-line staff to take on data collection and in some cases interpretation is because this area has been so people intensive. As marginal productivity decreases over large teams of backroom staff, some of the work was brought forward to the front.

What does this all mean for the industry?

There are two points of view. One is that the number of banking staff will decrease, replaced by clever algorithms. The other point of view, which history seems to bear out, is that the industry will actually grow. The marginal cost related challenges relating to going down the economic value chain in reaching customers will decrease. More businesses and individuals will be able to available of sophisticated products that were hitherto accessible by few. Banking and fintech will rapidly spread across geographies and the knowledge gap between the sophisticated banking centres of the world and the less evolved markets will close. Leading to economic growth in multiple geographies. This article supports the latter view. There is no doubt that the UAE will benefit enormously from the deployment of advanced tech in financial services, bringing it on par with the best globally, creating an environment of excellence and entrepreneurship.