How the Pandemic Accelerates the Fundamental Need for RegTech Solutions

The current COVID-19 pandemic will drive broader adoption of regulatory technology (RegTech) solutions and automation worldwide. Its impact on financial ecosystems and banking infrastructure -- and the fundamental need for regulatory compliance -- will only grow as the financial sector seeks to pare costs and meet regulatory demands.

Broadly inclusive of any solution that addresses regulatory challenges and helps companies understand and stay compliant with regulatory requirements, RegTech can range from complementing existing compliance, audit, and risk workflows to automation via artificial intelligence (AI), machine learning (ML), and deep learning (DL). These will be key as enterprises develop and implement business continuity plans to survive the coming downturn while also keeping down costs.

Globally, financial institutions (FIs) are encountering heightened operational and compliance risks due to the COVID-19 pandemic. RegTech solutions can play a pivotal role in predicting and preventing the next financial crisis, such as flagging Non-Performing Loans (NPLs) and other violations that risk the financial system’s health.

Financial regulators globally are offering relief and guidance to various players in the finance ecosystem. In Europe, the European Central Bank (ECB) announced measures to grant greater temporary flexibility in classifying debtors, while NPLs under public guarantees will benefit from preferential prudential loss-provisioning treatment.

Meanwhile, the Monetary Authority of Singapore (MAS) has worked to ease systemic financial stress. Some measures include a USD facility that provides up to US$60B of funding to banks in Singapore to support stable USD liquidity conditions and a S$125M support package for the fintech and financial sector during the wake of the pandemic.

Post-pandemic, Asian jurisdictions will need better and more efficient business regulation to overcome their ever-growing compliance burdens, especially for financial services firms. Regtech tools can help companies improve compliance, mitigate risks, and streamline operational and internal processes.

Moreover, with the need for lean corporate spending, RegTech solutions can help corporations avoid fines for non-compliance by synchronizing them with the growing regulatory and compliance requirements and making compliance a positive lead rather than the traditional so-called ‘necessary evil.’

Singapore as Regtech Node

According to a Verint whitepaper, “Financial Compliance in 2020: Asia Leader’s”, Singapore is perceived as supporting proven financial RegTech offerings. In contrast, London is perceived as comparatively reluctant to promote RegTech offerings, identifying issues without offering specific solutions. However, if you look at the level of RegTech adoption, London scores far better than the city-state.

The city-state ranks fourth globally, behind New York, London, and San Francisco on the Global Fintech Index 2020. As a major international financial center, financial services contributes 13 percent of its GDP and employs about 200,000 workers. Yet, the adoption of RegTech solutions is still relatively low.

Partly due to the educational part (traditional businesses still think in traditional ways and therefore don’t see the real benefits of transforming into the digital age). The crucial questions like how it can be important for me and my businesses are not being asked. On the other hand, the industry solutions are still seen as an early stage- there are not many series B backed- solutions providers available in Singapore (yet), which is likely to become a game-changer post-COVID-19.

Even pre-pandemic, it is no secret that compliance was a growing challenge for FIs and financial service providers worldwide, not just Singapore. The increasing complexity of market-specific regulatory processes and requirements and rising costs of compliance and innovation pressure have driven financial services to invest in intelligent solutions that employ modern technologies. This pressure will only grow in the aftermath of the COVID-19 pandemic.

Regtech solutions offer the bigger FIs substantial savings in regulatory fines while concurrently displacing manual risk and compliance, digitizing compliance procedures, and eliminating backlogs. However, the impact of the pandemic will be really painful for the smaller FIs and SMEs, while larger FIs have some savings or will be able to actually buy a RegTech solution. The SMEs, however, wouldn’t have that luxury. Therefore, it is even more crucial that RegTech solution providers understand what kind of products will be market fit and are still secure, relatively cheap, and easy to implement for the big FIs and even more so for the growing groups of SMEs, FinTechs, and smaller corporates.

With regulators tightening their grip through new legislation -- compounded by fragmented rules internationally and intra-regionally -- regulatory burdens are not easing. Regtech companies can streamline compliance workflows and reduce error margins for the supervisors (The so-called SupTech solutions). Therefore, you could argue that RegTech solutions are not only beneficial for the “regulated” but equally beneficial for the “regulators” and are often overlooked.

Current infrastructure is inadequate to keep up with the amount of regulation being added. Legacy solutions cannot match the technical requirements regulators expect, while RegTech offers affordability and scalability. Contemporary solutions complement existing workflows, but the next wave of RegTech will leverage ML and natural language processing (NLP) to replace old policies and procedures.

Singapore’s advantage comes from its strategic geographic proximity to Southeast Asia states (within 4 hours flight) and major centers such as Tokyo, Mumbai, Shanghai, and Sydney (within 6-8 hours). Home to more than 200 banks, 600 fintech businesses, and 30 fintech innovation labs by end-2019 makes it a natural center of gravity for RegTech ventures and pilot projects in the region.

Successful pilot projects with customers can lead to it being rolled out across the region while also generating reference customers for businesses looking to deepen their Asian footprint. The relative regulatory parity with the US, UK, and EU also makes it easier for solutions from these markets to be adapted for Asian jurisdictions, with Singapore as a testbed.

Centrality of Compliance

In Asia, trans-national compliance requires a coordinated approach across the breadth of the enterprise, coupled with clear timelines and rationales for effective practice. This is essential for audits, regulator inquiries, and broader market stability, especially amid a health crisis.

Protecting businesses from future compliance risk requires that compliance remains visible and operational during this period. This way, companies can manage the post-pandemic wave of activity from a position of strength. This translates to compliance as an anchor for business continuity, with enterprises having to factor in how to manage compliance remotely and meet regulatory obligations.

Visible compliance and engagement with regulatory demands are necessary to build and sustain trust in brands, especially in turbulent times. Regtech offerings can help enterprises achieve this. However, trust in a business consists of three elements -- positive relationships, expertise, and consistency -- and strong compliance underwrites consistency and relationships. This is exemplified in the case of digital consumer banks. Through the 2010s, they have grown through catering to younger demographics. Differentiating themselves through a mobile-first digital approach has been a competitive advantage, but consumers still prioritize security and protection of their money.

To sustain themselves in the long run, building long-term trust with their customer base is critical. This means keeping costs low and incorporating strong customer authentication methods and ongoing monitoring with clear customer guidance. When concisely and meaningfully explained, help highlight to consumers that their funds are protected against fraud and Money Laundering, among other things.

Post-pandemic, embracing RegTech solutions like compliance automation will ease the burden of meeting regulatory requirements. It will also free risk management and compliance professionals to focus on improving reliability and performance and providing them the tools to focus on the more complex cases and strategic work to be a real added value for the businesses, customer experiences, and risk management.

In an age of remote workforces, where companies operate across different jurisdictions and timezones, RegTech solutions which can yield cost savings, enhance overall efficiencies, and improve customer experience is where the growth opportunity lies. However, whether RegTech solutions will be a market fit for the needs of post-COVID-19 for SMEs, FinTechs, and other smaller companies remains to be seen.