Financial institutions are increasingly looking to fintech and regtech tools, but so are regulators

Financial technologies (fintech) and regulatory technologies (regtech) are starting to see more adoption across the board, according to a recent survey by Thomson Reuters Regulatory Intelligence (TRRI). However, with their increased growth comes more attention from regulators – and if the experiences of large banks are any indication, financial institutions of all types and sizes can ensure that their fintech and regtech uses comply with applicable data laws.

Fintech and regtech use today

According to TRRI’s Fintech, Regtech and the Role of Compliance in 2023 survey report, which surveyed global financial institutions on their fintech and regtech planning and use, fintech and regtech are being used for a variety of reasons. For example, in fintech, uses involving information/data security were cited by a quarter of respondents, while uses involving payments (22%), customer management (21%) and credit risk analysis (16%) were also ranked as the top reasons for use .

In regtech, meanwhile, cyber resilience was cited by 20% of respondents, while compliance monitoring (16%), financial crime/anti-money laundering/sanctions (14%) and onboarding (14%) were also ranked as the top reasons for use.

This wide range of applications for fintech and regtech is perhaps not only due to the flexibility of today’s tools, but also due to the large number of technologies that fall under the fintech and regtech banner. For example, fintech includes, there were 12 different use cases that captured at least 5% of respondents. In fact, Columbia University calls fintech a “catch-all term” that includes “software, mobile applications and other technologies designed to improve and automate traditional forms of finance for both businesses and consumers.” This includes pieces of technology as diverse as mobile banking and payment services, wealth and financial management services, and e-commerce platforms (including for cryptocurrency). Regtech, meanwhile, is often seen as a subset of fintech, offering its own range of technologies, including compliance management, regulatory reporting and risk assessment tools.

With all of these potential pieces of technology and use cases, it’s not surprising to see that the budgets for these solutions and the skills needed to operate them are growing in tandem. Among survey respondents, 42% said their budgets for fintech solutions are growing, while 38% said the same for regtech solutions. Meanwhile, only 10% and 13% respectively said their budgets for these solutions are shrinking, while the rest either said their budgets were static or they did not have a fixed budget for fintech/regtech solutions.

To service these solutions, more than half of respondents (57%) said they have had to expand the skills within their risk and compliance functions to accommodate fintech solutions. Nearly a quarter (22%) of respondents reported going even further and investing in specialist skills for fintech tools, including 38% of all respondents in the U.S. While fewer companies have invested in specialist skills for regtech tools (11%), nearly half (47%) still reported that they need broader skill sets to accommodate these tools.

All in all, it is clear that the prominence of fintech and regtech tools in today’s financial institutions is growing. In many places, governments are also promoting this change. “The growing prominence of fintech and green and sustainable finance has been a game-changer in the global financial industry,” said Arthur Yuen, Deputy Chief Executive, Hong Kong Monetary Authority, in June 2022. “Financial institutions around the world are actively looking for experts with relevant knowledge and skills to help develop innovative fintech solutions or sustainable investment products, [and] manage the climate risk.”

Regulators on the line

Yet, even as governments see the benefits of fintech and regtech usage today, their own regulators are also taking a closer look at how these fintech and regtech platforms work. “Technology solutions offer the opportunity to deliver huge benefits and we should be ready to take advantage of them,” Elizabeth McCaul, a member of the Supervisory Board of the European Central Bank, said in a speech in July 2022. “But any technology solution must be supported by three pillars : an appropriate regulatory framework, adequate supervisory monitoring and […] a deep understanding […] not only of the potential, but also the limitations and risks of new technology.”

In the TRRI report, some financial institutions report that they have already engaged with regulators regarding their use of these technologies. More than a quarter of respondents (28%) said they had already spoken to regulators about fintech, 57% said they had not, and 15% did not know. For regtech, 21% said they had spoken to regulators, 59% said they had not, and 20% did not know.

However, the report also broke out the responses from the largest global systemically important banks (G-SIBs). Among this population, as many they said had spoke to regulators who had not — 43% of those asked, while the rest said they did not know. The half and half figure was exactly the same for both fintech and regtech solutions.

While it may not be surprising that the largest financial institutions are the ones more likely to talk to regulators, the report noted that G-SIBs are often a harbinger of future technology trends. In this case, it could mean regulators becoming familiar with fintech and regtech tools, with an eye to expanding their remit to the wider financial industry in due course.

“More widespread use of fintech/regtech by regulators themselves means that firms of all sizes would be well advised to engage in regular, in-depth conversations with their regulators about the use of fintech and regtech,” the report suggests. “This could help bridge the apparent disconnect between firms and their regulators.”

Regulators and lawmakers alike have already indicated an increased interest in fintech, especially following the collapse of crypto exchange FTX and the related cryptocurrency fallout. In the US, CFTC Commissioner Kristin N. Johnson explicitly called for legislative action, noting: “I hope that Congress will identify a whole-of-government approach to ensure that we prevent schemes that rely on regulatory arbitrage or take advantage of regulation. gaps that currently limit our visibility in digital asset trading markets and impede our ability to adopt rules necessary to carry out our mission in those markets – to protect customers, ensure market integrity and promote fair, orderly and transparent markets. »

Congress may well respond to the call. Around the same time as Commissioner Johnson’s call for action, U.S. Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking, Housing and Urban Affairs Committee, said in a press release: “It is critical that risks in this area are contained and not contagion over to traditional financial markets and institutions, and we draw the right lessons about customer and investor protection.”

Ultimately, fintech and regtech can bring a number of benefits to an organization, including improved efficiency and processing speed, improved data management, better risk monitoring and more. These solutions may even become a necessary requirement for the largest financial industry companies.

However, those institutions investigating their use would do well to examine not only the technical and operational aspects of integrating these technologies, but also the potential external regulatory risks these tools may pose.