The real business case for Regtech

The growing adoption of regulatory technology (Regtech) is being accompanied by a shift in awareness among senior leadership at banks of the wider benefits it offers their businesses. Alongside the realisation that Regtech assists with better controls and enhanced regulatory compliance, there is an increasing expectation that it can also be used to drive cost and operational efficiency. This shift in understanding helps to make the business case for the positive impact Regtech can have on an organisation’s bottom line.

Organisations need to become better at measuring Regtech’s outcomes, moving away from a one-dimensional view of its benefits in terms of compliance, and instead to start looking at a broader range of factors, including stakeholder value and building higher levels of trust, not only within their organisation but also among their shareholders, business partners and customers. This should encompass three things:

 1. A view of technology adoption to manage the future of banking

As banks future proof themselves to new channels, products and shifting customer bases, their traditional methods and platforms need to change.

Whilst most banks have established footprints in key markets, the establishment of virtual banking or, more simply put, the ability to bank without seeing the customer, now presents new risks and evolves existing risks. A view needs to be formed to determine if the technologies available will be able to cater to, or even leapfrog that change as quickly as the risk evolves.

Another consequent view that needs to be formed is the future of the workforce. The workforce needs to be supported by operating models and equipped with the skills and competencies needed to manage these new technologies and

the risks involved. Resources need to be remoulded to spend less time on the mundane, and more time on solving problems, enriching client experiences, and reducing risks.

 2. A broader application of technology beyond financial crime

Whilst financial crime is a common area of application for Regtech, its application in areas such as risk management and regulatory compliance also requires an equal focus. This includes areas such as conduct and customer protection, regulatory and tax reporting, and regulatory compliance obligations. In addition,

it expands into other areas, such as operational risk, market conduct, credit risk management and audit.

There are also instances where Regtech solutions designed for one area of a bank’s business have had benefits, or ‘cross pollinated’, in other areas. For example, a solution developed to address lending fraud has also been used to monitor loan portfolios to identify high-risk clients from a credit behaviour standpoint. At the same time, there are broader solutions that are being refined and repurposed to address specific issues. For example, audio monitoring at call centres to monitor for potential cases of mis-selling, is now also being used to identify fraudulent behaviour.

Another example of the additional benefits Regtech brings is in the area of using technology to screen credit portfolios. While helping banks to reduce lending fraud, this use case has also enabled them to develop new credit scoring systems. As a result of these new approaches, small and medium- sized enterprises have been able to gain greater access to financial products and liquidity, creating more opportunities for them as customers, and helping to service this important market segment.

3. A method to measure adoption beyond technology

As previously mentioned, the term Regtech can be misleading as it is often equated to just the use of technology. Instead, it is essentially and ultimately about people, because people and operating models change as a result of better technology being adopted.

As such, measurements of adoption are usually focused on headcount reductions, labour resource savings and man hours reduced because of automation. What is not measured is how people are moved and skilled to shift higher up the value chain as a direct consequence of the benefit of these newer technologies being implemented.

There are numerous methods to measure success, but these are often focused on measuring efficiency gains and optimisation, and less on effectiveness. A different view needs to be formed.

A good view to measure regulatory technology should be three-fold – one should look at customer experience that translates to better revenues earned and brand loyalty. The second should be the identification, detection and remediation of risks as a direct consequence of the technology implemented. Lastly, it must have an impact on cost savings and to the organisation’s bottom line and shareholder value.

Board members ultimately want a view of how investments improve the bottom line and share value as much as they want to see risks being managed and avoided.

Overcoming adoption challenges

Despite growing awareness of the benefits Regtech offers, banks still face a number of hurdles in incorporating it into their operations. These challenges range from finding the right vendors and solutions, to reskilling the workforce, taking a holistic approach to Regtech adoption and overcoming limitations created by legacy systems.

While the availability of new technology presents an advantage, it also creates issues because most solution platforms are singular in purpose, even with end- to-end capabilities. As a result, it can be challenging for an authorised institution to go about ensuring broader Regtech adoption when it has the view of adopting Regtech one solution at a time. Other issues include the question of whether the technology can be trusted and how long it will be before it gets outdated.

In addition, there are concerns about who will be there to work things through with the organisation from start to end across its entire adoption strategy, and what approach to adoption presents the least amount of risk while achieving the greatest benefit.

Banks currently tend to go to individual vendors to find solutions to the different issues they want Regtech to assist them with. As the Regtech ecosystem develops, there is likely to be increasing demand for a ‘one-stop shop’ that can help direct banks’ technology adoption and implement solutions that meet all of their needs. Banks need a trusted advisor that both understands the market, the designs, and culture, and is in the market to assist them throughout this journey, as well as the next.

A key issue, as previously alluded to, is workforce transformation. The skills, experience and capabilities that banks will require from talent in the future  as they continue their digitisation and Regtech adoption journeys, will be substantially different to those they require today. As a result, banks not only need to focus on recruiting new talent, but also reskilling existing talent. The HKMA launched its Enhanced Competency Framework on Fintech at the end of 2021, establishing a set of competency standards for fintech and Regtech practitioners in the banking industry to help build capacity in this area. Even so, the banking industry still faces a significant talent gap, and the scale of re-educating their existing workforce in order to realise their digital aspirations should not be underestimated.

Another challenge is that the legacy systems and operating environment of many banks hamper their ability to introduce new technology. To overcome this issue, they need to improve their internal infrastructure and accelerate their cloud adoption, seeing the introduction of Regtech in the context of wider digitisation. At the same time, they must take steps to make the necessary information and data available to ‘plug in’ to Regtech solutions to enable banks to gain the maximum benefit from them.

Banks should also focus on being part of the broader Regtech community, participating more in the sector to help them better understand the market and the solutions that are available.

In addition, banks need to take a bolder approach to Regtech adoption, as there is currently a tendency for banks to be too conservative in incorporating new and emerging technology, with innovations often not getting beyond the proof of concept stage. This is in part the result of their reluctance to work with small vendors or new providers that do not have a proven track record. But to get the right solution this challenge needs to be overcome.

 Looking to the future

In the meantime, there is a trend for Regtech providers to develop increasingly specific solutions catering to niche areas of business, such as solutions that  help compute the ownership of companies, or ones that detect impersonation fraud through remote devices. As the market continues to develop, and Regtech vendors mature, there will likely be more convergence, with different providers working together to develop more innovative and broader solutions. Providers are already coming together to develop solutions that can be plugged into each other’s systems, as there is a growing realisation that the Regtech ecosystem will be more powerful if vendors work together.

If you would like to know more about our perspective on Hong Kong’s banking sector in 2022, please read the full report here.

This article was co-authored with James O’Callaghan, Partner, Head of Regtech, Hong Kong, KPMG China / Chad Olsen, Partner, Head of Forensic, Hong Kong, KPMG China.