An industry as robust and ancient as finance can hardly exist without depending on some key fundamentals that act as its backbone, and regulation is one such cornerstone that carries the weight of providing stability and security to the industry around the world. Strict monitoring and thorough regulatory processes provide the framework for financial institutions to service their customers across a variety of channels, and today these channels are expanding through FinTech as it propels digital finance into unprecedented stardom.

Enter RegTech (regulatory technology), FinTech’s pillar of support that aims to digitally transform the regulatory aspect of financial institutions by facilitating compliance processes and the general transition to digital. RegTech is the virtual version of its physical counterpart, and a critical enabler of FinTech, because simply finance cannot prosper without regulation that guarantees the best possible outcome for all parties involved. Even if certain financial institutions are still reluctant to make the transition into digital as of yet, RegTech can still empower regulatory compliance and speed it up dramatically due to its innate digital nature.

Regulatory obligations can vary greatly depending on the financial services being offered by different FIs, and the process is a continuous one due to the constantly changing nature of rules and regulations. This adds to the complexity of satisfying customers and catering to their dynamic financial needs; needs that are increasingly driven forward by a hunger for convenience and innovation.

As financial technology advances in all areas at a rapid pace, regulatory processes is always there to govern its laws and ensure that all parties have their rights preserved and their demands met in compliance with the law. RegTech companies today are employing their own innovative approaches to enhancing the quality, speed and simplicity of meeting complex regulations. Existing and emerging technologies like artificial intelligence (AI), machine learning (ML) and natural language processing software are all being adopted more and more by FinTechs themselves and also by FIs expanding into tech; as such, RegTech needs to find ways to implement these concepts and rise to the challenge of keeping up with the entities that they regulate. This is also a dynamic challenge that needs constant updating and close tracking, seeing as the rapidly changing technology landscape keeps on demanding revised processes to accommodate these changing requirements.

To understand how RegTech came to be relevant, we need to revisit its origins in relation to these breakthrough advancements. Artificial Intelligence (AI) and Machine Learning (ML) are increasingly sought after for enabling the automation of systematic processes and for speedy and reliable analysis of huge data sets; a notion that greatly aligns with regulatory compliance and its general application to the digital finance ecosystem. AI began to catch on in the commercial world during the 2010s, a decade that set the stage for a lot technological innovation that we use today. Deep learning and neural networks enabled us to allow machines to “learn” as opposed to creating labor-intensive programs that require a lot of time and effort. After this point, companies started leveraging the capabilities of AI and ML to disrupt and innovate in different sectors, and this new power held tangible advantages in regards to its application on the regulatory industry. RegTech became an emerging technology that financial firms were skeptical of in the beginning, and for good reason; the regulatory compliance industry had developed itself over many years and had reached a point of near perfection with hardly any margin of error. Now this disruptive force was threatening this state of near perfection and financial institutions were not buying it. However investors acknowledged the potential and depth of regulatory technology, and investments started pouring in as RegTech applications proved their worth, elevating the new concept from innovation to the maturity phase and enabling RegTech companies to convince financial institutions of the real and tangible value they present.

Forward to today, the use of RegTech as increasingly important trend is applied to more and more areas of finance, as both traditional financial institutions and FinTech companies benefit from digital regulatory compliance processes. Real-world examples of RegTech today are an abundance, including providing solutions in data management and quantitative analysis for banks and FIs to process big data and utilize the results in more efficient decision-making, KYC (Know Your Customer) and customer authentication procedures, and fraudulent activities and money laundering detection through deep learning algorithms. RegTech also offers key solutions in the areas of knowledge management, risk management, tax management, regulatory change management and workflow automation.

The speed and reliability of technology enables the reallocation of resources from these once-manual operations to other areas inside FIs, leading to reduced costs, enriched data, better efficiency and more. However, the advantages of technology don’t come without their challenges and associated risks, an idea that is especially pertinent when it comes to finance. There is a looming danger of cybercrime that persists in the minds of consumers and institutions alike, and this is an issue that needs ongoing attention and vigilance by RegTech companies in regards to their counter-fraud measures.

Despite the risks involved, innovative RegTech and FinTech companies are filling gaps and providing faster and more convenient ways of handling tasks that were once met with resistance and uncertainty by financial institutions. Technology today is revamping conventional finance to make services more accessible while reducing cost and time spent, in addition to providing several financial inclusion opportunities for the unbanked and underserved populations. RegTech is proving itself to be a valuable addition to the digital finance industry, as regulators and financial institutions alike embrace the change and reap the benefits of a successful union; a union whose rewards outweigh its risks so far.