RegTech explained: a crucial toolset for the financial industry

RegTech explained: a crucial toolset for the financial industry

Every organization in the financial industry needs to meet certain regulatory obligations, even if it’s just filing a tax return or submitting an annual report. In certain industries, such as financial services, they’ve added their own additional sets of rules that must be adhered to. For example, organizations who take and process credit card payments have an obligation to meet the Payment Card Industry Data Security Standard (PCI DSS).

To make keeping up with new regulations easier, financials are turning to RegTech. RegTech is the contraction of the words Regulatory Technology. In the financial word it is one of the hot topics. What is it and why is it so popular? Read on.

What is RegTech?

By definition, RegTech is an innovative technology that enables organizations to effortlessly adjust to the weight of always expanding needs for regulatory reporting. In essence, RegTech providers are an industry within the financial industry that provides other members of the financial world with the technology that helps them to stay current with ever-changing rules and regulations.

The wins for the users of RegTech consist mainly of these elements:

  • Gain efficiency by streamlining and harmonizing processes within the organization.
  • Reporting of compliance and issues is made easier by prefabricated, but often customized, modules.
  • Risk can be identified and countered quicker by using smart technology.

To achieve these goals, RegTech uses 5 different types of technology:

  • Monitoring processes to obtain a real-time objective about what is going on in the organization. This is essential for reporting and risk identification goals.
  • Reporting is often a mandatory part of new regulations and, by constant monitoring, the required reports can be produced at the touch of a button.
  • Data exchange is another part of many new regulations, specifically those that help startups on their way. Technology to enable and monitor the exchange of data helps to comply with these regulations while keeping an eye on data streams.
  • Internal legal departments are supported with tools to make the implementation of new regulations more efficient and thus cheaper.
  • Automation is introduced where possible to avoid human mistakes. The jungle of regulations can easily lead to human error. Monitoring and streamlining can help to avoid such errors. Reporting will have to record them if they should occur, nonetheless. And corrections can be applied where needed.

What makes RegTech so popular?

At one point, the financial industry was under a lot of stress due to new regulations. Depending on the country financials are working from and the regions they plan to do business with, the range of regulations they have to comply with can be challenging. RegTech helps financials to respond in a cost-efficient and versatile way, while maintaining a high standard of quality and security.

How does Regtech work?

This is a very hard question to answer as developments are happening at a fast pace. Every new regulation creates opportunities for the RegTech companies to work on new technology and offer it to banks, financial institutions and FinTech companies. On the other side, RegTech companies supply the supervisory agencies that lay down the rules and regulations with the technology to check compliance by the constituents. This branch is sometimes referred to as SupTech.

For example, by combining Artificial Intelligence (AI) and Big Data it is possible to predict suspicious behavior by monitoring transactions in real-time and scanning for irregularities. This technology will pick up the signals much sooner than any human possibly can, and helps to find patterns indicating money laundering and terrorist funding.

Security implications of RegTech

Many of the regulations are laid down with privacy and security in mind. A correct implementation of these regulations should not pose a problem in this field. On the contrary, if the regulators are accomplishing what they set out to do, these regulations should lift the privacy and security demands to a higher level.

Also, implementation of RegTech gives the in-house security teams at financial organizations the opportunity to focus on other issues as the technology takes over one part of their job. This doesn’t mean internal teams should let go of the process entirely, even though that might sound appealing as they often have a lot of other things on their plate, but it should ease the burden somewhat.

It’s not only necessary to measure the effectiveness of your organization’s security controls against the regulations, but also to check whether new and anticipated legislation does not interfere with your existing security standards. An obligation to offer information to your competitors should not reduce your defenses against a data breach. The Know Your Customer (KYC) documentation not only authenticates the customer’s credentials but also helps maintain a verified record of customers. Regulatory compliance mechanisms like the KYC registry store extremely sensitive personally identifiable information (PII) and elaborate customer data. So, it is important to devise systems that prevent unauthorized access, minimize cyber risks, and limit the possible consequences of a data breach.

Risk and compliance functions use different methods to keep up with regulatory challenges. They use software as a service (SaaS) in the cloud to identify risks, strategize risk tolerance, and facilitate regulatory requirements across various regions and financial services.

How does RegTech provide data security and privacy?

There are some key areas where RegTech contributes to keep our data safe:

  • Fraud prevention. Information provided by criminals can be checked against existing KYC data. This helps to prevent identity theft and abuse of stolen data.
  • Money laundering and terrorist funding are other areas that are monitored by using KYC data.
  • Compliance with national regulations. On top of worldwide and business standards you will often find local standards are applied.
  • Cloud security tools to keep data stored in the cloud at the same safety level as locally stored data.
  • Authentication methods to ensure a high level of security. For example, multi-factor authentication (MFA) methods, cryptography, and encryption.

As more and more business collect PII, customers are concerned about their personal data security and their privacy. And as cybercriminals get more sophisticated, the need for more advanced and effective tools has risen. RegTech companies provide an important part of this new technology for the financial industry.


Pieter Arntz

Malware Intelligence Researcher

Was a Microsoft MVP in consumer security for 12 years running. Can speak four languages. Smells of rich mahogany and leather-bound books.