After the financial crisis of 2007, digital technologies and artificial intelligence reinvented the world of finance. The term "fintech", which refers to start-ups that provide low-cost financial services, was then introduced. From this emerged collaborative finance platforms, virtual wallets, online payment solutions, financial management tools, insurtech companies (start-ups operating in the insurance sector) and regtech companies (start-ups that help banks meet regulatory compliance requirements).
Regtech, a rising branch of the fintech industry
This branch of fintech was introduced to provide financial actors with a solution for the management of regulatory constraints and risks. In an effort to alleviate the burden on companies and banks, regtech start-ups offer to outsource their compliance functions, which are often time-consuming and labour-intensive. Their services are based on innovative technologies such as artificial intelligence, big data and cloud infrastructures.
Although software that helped organisations to meet regulatory requirements already existed before the advent of regtech, the introduction of a series of legislative frameworks (PRIPs, Mifid II or GDRP) and the mass of data available have made them obsolete. This multiplied the risk of non-compliance.
Regtech companies hence undertook the challenge of addressing the needs of financial institutions by intervening at several levels. In addition to their ability to propose innovative solutions, they need to master financial evaluation methods and understand the specific issues that the industry faces.
By tapping into artificial intelligence, regtech companies assist financial institutions, for example, in their data verification processes regarding their future customers, as prescribed by the "Know Your Customer" policy. This data verification process helps in the fight against money laundering and terrorism.
Thanks to a range of solutions, financial institutions can speed up their processing time: optical character recognition for the rapid integration of handwritten or printed data, biometric identification to confirm a person's identity remotely, and Robotic Process Automation to automate manual tasks during the customer’s onboarding.
Data management services related to data governance and monitoring rely on big data technology. And with the help of cloud technologies, Regtech also offers financial organisations the means to automate their reporting activities, which is a requirement of regulatory bodies. The streamlining of data processing operations provides banks and companies with greater efficiency and agility. Data protection and monitoring of banking transactions are also fields in which regtech startups are particularly interested.
Financial institutions are now embracing blockchain
Blockchain technology that has found its way into the fintech sector offers more transparency and efficiency to financial institutions. By eliminating traditional paperwork and administrative structures, many of these organisations are also able to reduce their expenses.
The Banque de France is no exception and has set up the decentralised interbank registry Madre, which leans on blockchain technology to simplify transfers. The authorities that regulate the financial arena are also embracing the technology. The Securities and Exchange Commission (SEC) in the United States, the Financial Conduct Authority (FCA) in the United Kingdom and the Monetary Authority of Hong Kong are among the institutions that recognize the added value of this technology in the financial sector.
An up-and-coming industry
As compliance regulations, particularly in Europe, continue to intensify and data management raises ethical issues, regtech companies offer reliable and secure solutions. In fact, this sub-sector of the fintech industry, which has made its way into the financial world, aims to become a key player in the field of compliance management.
Selon l’étude Regtech Sia Partners-AEC Fintech, environ 30 % des banques prévoient l’intégration des solutions regtech en Compliance Management dans les années à venir. Et on s’attend à ce que le marché mondial des regtech atteigne les 33,1 milliards de dollars d’ici 2026. Le marché de la fintech française a lui affiché une performance remarquable en 2020 avec 983 millions de dollars. Des chiffres qui témoignent de la solidité de cette industrie en plein boom.