Hu Yoshida

Is RegTech the new FinTech?

Blog Post created by Hu Yoshida on Jan 20, 2017

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Last April, I posted a blog on Digital transformation in the Financial Industry where I talked about the impact of Financial Technology (FinTech) startups on the financial industry. FinTechs use technology to develop innovative new financial products. While they are not likely to pose a true risk for traditional banks, they are disrupting the industry by improving the quality of financial services and disrupting traditional revenue streams.

 

Many of the established financial institutions have active programs to work with or invest in these startups to develop new or improved financial products, services and processes. Innovative countries like Singapore Monitory Authority and the UK Financial Conduct Authority have established “regulatory sandboxes” to encourage FinTech innovation in the financial sector. This sandbox is a production environment that operates in a well- defined space and duration for the proposed financial service to be launched, where the consequences of failure can be contained. This last August Hitachi Ltd. and the Bank of Tokyo-Mitsubishi UFJ (BTMU) used the Singapore MAS sandbox for Proof of Concept (PoC) testing for a system, based on blockchain technology, aimed at digitalization of checks in Singapore.

 

The need for regulation is paramount in the Financial Sector Industry (FSI). Unlike disruption in other market sectors where an Uber or Airbnb can go to market first and then ask for forgiveness, FSI’s cannot afford to take such risks with the law or with the trust of their clients which was severely stressed during the financial collapse of 2008. Now with 5 billion smart phones, creating transactions and information across new electronic financial instruments, there is an increasing avalanche of data from different sources that must be correlated and analyzed in relation to new business models and regulations. And this must be done in near real time order to be effective. In addition to the PCI, money laundering and KYC (Know Your Customer) requirements are new privacy and reporting requirements which may vary by sovereignty. It is no longer sufficient to do a self-audit by checking a box on a form, it now requires software to ensure transparency, immutability, and compliance. Consequently, the financial sector and the regulators must develop more efficient and effective approaches to regulation of the financial markets..

 

Since a lot of the technologies that banks are developing have to do with improving the customer experience with personalized services, there has been an increasing amount of new regulations around privacy concerns. One of the more far reaching regulations is the General Data Protection Regulation (GDPR), which was adopted by the EU in April 2016 and is due to be implemented by May 2018. This regulation applies to any organization, regardless of location, that acts as a controller and/or processor of personally identifiable information of EU residents and so it has a global impact and a very short window for compliance. The primary objectives of the GDPR are to give back to EU citizens, the control of their personal data. Key points include the need for consent to use personal data, the right to erase personal data, and the requirement to notify individuals in the event of a breach. Sanctions include a fine up to 20,000,000 EUR or up to 4% of the annual worldwide turnover of the preceding financial year in case of an enterprise, whichever is greater. These fines raise a major financial risk for any company doing business in or with EU countries. Hitachi is studying this regulation and developing solutions to address GDPR with our Hitachi Content platform (HCP) object store,  Hitachi Content Intelligence (HCI) data discovery platform, and Pentaho data integration and analytic solutions.

 

GDPR is an example of how digital transformation in financial markets is creating disruption for the regulators which in turn magnifies the disruptions in the financial markets. This has given rise to the new category of startups which the industry is calling RegTech for Regulatory Technology. Deloitte has published a paper on this which proclaims that ”RegTech is the new FinTech - How agile regulatory technology is helping firms better understand and manage their risks”. This paper lists the key characteristics of RegTech which are:

 

  1. Agility – cluttered and intertwined data sets can be de-coupled and organized through ETL (Extract, Transfer Load) technologies
  2. Speed – Reports can be configured and generated quickly
  3. Integration – short timeframes to get solution up and running
  4. Analytics – A recent Deloitte report3 quoted biologist Edward Wilson “We are drowning in information, while starving for wisdom”. RegTech uses analytic tools to intelligently mine existing “big data” data sets and unlock their true potential e.g. using the same data for multiple purposes.

 

I don’t know if I would go as far as saying that RegTech is replacing FinTech, but it certainly is attracting a lot of interest in the financial sector.  We are engaged in this area with our HCP, HCI and Pentaho solutions. The Deloitte paper mentions Pentaho and data lakes as one of the key technologies. Pentaho already helps FINRA (Financial Industry Regulatory Authority) regulate member brokerage firms and exchange markets

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While today RegTech is focused on the financial sector, it could easily be expanded to healthcare, energy, and other business sectors which face regulatory scrutiny. Here is a short list of companies in the growing list of RegTech startups.

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