Regulation Technology Solutions Enable Innovation in Finance

A recent EY report predicted that the adoption of financial technology (fintech) solutions by consumers is expected to double in 2016.

The surge is fueled by out-of-the-box thinking that has brought about disruptive concepts, for example, the use of Facebook likes and Twitter followers as data points in decision-making models around lending and risk. As a result, fintech has made financial services more accessible to more people.

Meanwhile, banks are falling further behind and unable to integrate new innovations with flexible architectures. In fact, legacy systems are the biggest barriers keeping banks from offering enterprises and customers with more personalized 24/7 real-time services from any location. In addition, the banking industry is under ever increasing regulatory scrutiny and suffering billions of dollars in compliance related fines. It’s not surprising, then, that many banks are reluctant to consider any big changes in terms of technology.

When it comes to financial industry regulations for fintech, the rules are also often in flux and can be difficult to interpret. This makes it challenging for fintech startups to know what regulations apply to their businesses.

However, it is vital they do not fall behind, as penalties for failing to comply with industry rules can be crippling, especially for startups with small budgets. With disruptive technology changing the face of the market, regulations need to adapt at a similar pace. As regulators catch up with fintech, there is a growing need for the same kind of disruptive innovation to help companies keep up with the increasing demands and regulatory complexity.

Regulation technology, or RegTech, is defined as any technological innovation that helps improve efficiency, transparency and adherence to regulation. RegTech has emerged as a result of the growing need for more effective and efficient methods for businesses, both traditional and startup, to stay compliant in industries facing increased regulatory protocols and complex regulatory transitions.

Trulioo, a Canadian-based company, is already a world leader in this emerging RegTech sector. Their global identity verification platform allows financial services and online marketplaces to seamlessly expand business operations internationally by solving the problems of changing jurisdictional regulatory landscapes. Listed as one of the 21 hottest RegTech startups that are defining the industry, the Vancouver technology company is helping clients like Stripe and PayPal land and expand into new markets with increased efficiency, more transparency and reduced operational costs.

“Our global, real-time identity verification gateway enables organizations to combat regulatory compliance issues strategically, instead of tactical responses to new legislation that ultimately lead to cumbersome processes,” said Zac Cohen, General Manager at Trulioo. “Banks and fintechs alike are able to better manage risk, increase efficiencies and cost savings, and make better use of data and resources. We give our customers a significant competitive advantage in a digital age where customers abandon ship if the on-boarding process is cumbersome and slow.”

In Europe, where new regulations are being defined under the revised Payment Services Directive (PSD2), regulators are forcing financial institutions to become more fintech-friendly. One of the key initiatives of PSD2 is to build a payments ecosystem that brings down barriers for fintech startups to enter the marketplace. European lawmakers hope that by opening payments to greater competition, consumers will have access to more affordable financial services that are easier to use. PSD2 also presents opportunities for Canadian companies looking to expand their presence in Europe as the market begins to open up to new players.

“Traditional banks have started looking at customer data to create innovative business models,” said Devie Mohan, fintech reporter for BankNXT. “Some of them partner with fintech firms to obtain nontraditional data such as social media or biometric data points, and others adopt technologies to making existing processes such as KYC easier.”

As regulations become more stringent, the amount of data collected will equally continue to increase. The technology to manage and process big data already exists. The next wave will be mass RegTech adoption as companies embrace data analytics and advanced technologies to improve user experience, reduce operational costs, mitigate risks, offer real-time reporting and auditing, and perhaps most importantly, protect against fines and penalties from international non-compliance.

Now that financial institutions need to store larger amounts of data to meet the requirements of regulators, their ability to stay compliant using existing processes will become more difficult. RegTech provides a more reliable and efficient solution to disrupt regulatory compliance, just as fintech has disrupted financial services with new ideas and new approaches.

“RegTech is an extremely vital piece of the FinTech puzzle,” says Christine Duhaime, a financial regulatory lawyer and founder of the Digital Finance Institute. “It allows financial services to remove friction for clients at the on-boarding process with more efficient and effective compliance solutions that mesh with emerging innovative technology. A more efficient compliance tech solution allows banks to mitigate risks more responsively, saving significant operational costs. This is a hot issue right now and 2016 is clearly the year of RegTech.”

The future of RegTech and its potential growth area for Canada and Vancouver is part of a FinTech Canada Report being written by the Digital Finance Institute and McCarthy Tetrault LLP, being released at the FinTech Conference on April 14. Trulioo will be participating in the panel discussion on “RegTech – How Regulation and Technology Matter for FinTech,” and providing thought leadership for the FinTech Canada Report, along with over 50 other FinTechs and service firms.