The real promise of regulatory technology

The future of banking is algorithmic. Bringing together big data and predictive analytics is already enabling financial service providers to make better real-time decisions on loans and other products, with a more flexible, customer-centric user experience.

But if banking can be algorithmic, what about financial regulation and supervision?

Financial authorities could someday run digitally, but getting there is not going to be easy. In many countries, regulators today often use fax machines, let alone cloud-based software and analytics. And yet, the future of the financial sector depends on modernizing regulatory authorities.

The fallout from the 2008 financial crisis has led to regulators, especially in more developed economies, asking for more data from providers and more scrutiny of that data. Developed markets have seen a 492 percent increase in regulatory changes between 2008 and 2015, especially in anti-money laundering and consumer protection. It was famously reported that by the end of 2014, Citi had added a total of 30,000 people just working on regulatory compliance.

At the same time, the rapid growth of FinTech has pressed regulators to consider new tools to regulate faster and quickly supervise new financial services solutions. India alone has seen 10x growth in digital lenders in the last three years and the Reserve Bank of India licensed close to 20 new entities in the last year—expanding the banking supply for the first time in decades.

The nascent regulatory technology or RegTech sector is already aiming to help financial firms. Digitizing paper reporting processes alone could save billions in compliance costs. The global cost to the financial services industry of compliance with regulatory authorities is estimated at $100 billion per year—a number that’s risen drastically since the 2008 financial crisis. For many financial firms, compliance is 20 percent of their operational budget.

Some of those same technologies can also help regulators.