You've Heard of Fintech, Get Ready for 'Regtech'

By Memminger, Matthias; Baxter, Mike et al. | American Banker, September 8, 2016 | Go to article overview

You've Heard of Fintech, Get Ready for 'Regtech'


Memminger, Matthias, Baxter, Mike, Lin, Edmund, American Banker


Byline: Matthias Memminger, Mike Baxter, Edmund Lin

Editor's note: An altered, longer version of this article will be published later this month on the Bain & Company website.

How can banks better manage one of the costliest and most troublesome activities -- complying with regulations? Increasingly, banks may benefit from working with "regtech" firms.

Consumer financial services products are being transformed by the fintech revolution, but automation, data innovation and other technological efficiencies can also benefit banks' efforts to comply with a growing regulatory burden and improve their internal governance controls.

Given the high stakes, however, banks should gain a better understanding of their regtech options and make a careful assessment of which high-priority objectives they are trying to accomplish in partnering with a regtech firm. They will need to bring regulators into the conversation before committing to such a partnership. And they must ensure that combining third-party technology and services with their internal processes does not create more system complexity.

Bain & Co. has identified more than 80 emerging regtechs. The rise of these firms should be welcome. Banks have been reducing their cost base for several years now. Many of the efficiency gains, however, have been offset by resources required to meet expanded regulatory requirements and to settle fines. We estimate that governance, risk and compliance (GRC) costs account for 15% to 20% of the total "run the bank" cost base of most major banks. GRC demand drives roughly 40% of costs for "change the bank" projects underway.

Banks have struggled to devise a robust and efficient approach to compliance by using their own legacy systems and GRC organization. Typically, the required data resides in different bank systems and is hard to extract in the appropriate structure or level of quality because that requires modern technology. For example, implementing online customer onboarding (which triggers know-your-customer regulations) through legacy systems can take two years at a cost of more than $10 million at some major banks, versus three months at $300,000 if handled through a regtech specialist.

Borrowing a biological metaphor, regtechs can provide brains, guts and backbone to improve GRC processes in a number of ways.

The regtechs' "brains" advantage stems from their expertise in extracting and structuring data, mixing it with unstructured sources and devising algorithms to derive insights. These firms extract and integrate data from banks' proprietary systems, third-party data providers and public sources. They design algorithms to crunch the data in automated, scalable ways. And they use machine learning to continuously improve the quality, precision and reliability of the insights that emerge.

Regtechs also provide the "guts," or processes for smart, standard-setting governance and control. …

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