Cognizance of Data Storage- RegTech Industry

The increase of technology firms and startups have opened access to troves of consumer data. The evolution of new data-sharing techniques has compromised data security. The data leak in Blackrock and the controversies around the data servers of the State Bank of India have exposed the vulnerability of data and its management, in recent times.

As more Fintech firms evolve, there has to be a framework to regulate the industry and the data that it generates. As there is an increase in the quantity and type of data. This new era presents newfangled challenges for regulators and accentuates why the evolution of Fintech necessitates a parallel development of RegTech.

What is Regtech?

RegTech refers to technological solutions that streamline and improve regulatory processes. It enhances the delivery of compliance requirements. It uses many cutting-edge technologies such as artificial intelligence, big data, cloud computing, machine learning, to name a few, which ensure companies are more effective in reaching regulatory compliance. RegTech has helped to minimize the risk of human error by automating the processes.

Currently, in its second stage of development, RegTech is being used by both institutions and regulators to address increasingly cumbersome compliance processes. However, we are yet to unlock the transformative potential of RegTech.

Not only does it represent a natural response to the digitization of finance and the fragmentation of the industry participants, but it also has the potential to minimize the risk of regulatory capture, similar to the ones that occurred before the GFC. It also helps us to tackle the problem of Risk arbitrage.

The true potential of Regtech lies in its ability to achieve a profound transition from a ‘Know Your Customer’ (KYC) to a ‘Know Your Data’ approach- underpinned by efficient and effective processes for collection, formatting, management, and analysis of reported data, accompanied by a fundamental data-centric mindset.

Evolution of RegTech

RegTech has unfolded in three stages. The first, RegTech 1.0, was led by large financial institutions that integrated technology into their internal processes to combat rising compliance costs and complexity, as epitomized in the Basel II Capital Accord. The second stage, RegTech 2.0, has been driven by the new-post GFC regulatory requirements. It is primarily centered on the digitization of regulatory compliance and reporting process. At the same time, regulators are seeking to mirror the increasingly digitized nature of the markets they monitor and enhance their capacity to analyze the rising volumes of data generated by post-GFC reporting obligations. In the future, RegTech will exhibit its greatest potential in the third stage of development- RegTech 3.0. Where the technology will help us conceptualize finance and its regulation to build a better financial system

The FinTech sector is shifting its focus from the digitization of money to the monetization of data, making it imperative for new frameworks to accommodate novel concepts, such as data sovereignty and algorithm supervision. A sequenced (sequential) approach to the development of FinTech within a RegTech framework is necessary.

Fintech 3.0

Fintech is the delivery of financial services using technology. Fintech 3.0 started around 2007 to 2008, owing to a confluence of factors, which have all contributed to the shift from Regtech 2.0 to 3.0.

· The growth of technology firms and startups.

· The poor performance of banks.

· The Global Financial Crisis (GFC), which led to the loss of trust in banks amongst people owing to huge collapses and bankruptcies.

· Smartphone penetration.

· Increased sophistication of Application Programming Interfaces (API).

Advantages:

1.     Cloud-based Solutions- In Cloud-based solutions, the data is remotely maintained, managed, and backed up. It provides advantages concerning cost, flexibility, performance, and security.

2.     Data Analysis- It has a flexible and secured operating model, which enables Big Data and proper analysis of data. It Enables clarity and efficiency in the interpretation of ‘Regulations’

3.     Efficiency-It improves agility and speed.

4.     Compliance and regulation- It’s a robust framework that enhances regulatory and compliance requirements. Thus, there is greater harmony in the industry.

Challenges:-

1.     Cost- The cost and time involved in establishing Reg-tech are expensive and capital intensive. Regulators must invest heavily in the development of proportionate, data-driven regulation to effectively handle innovation without having to compromise on their mandate.

2.     Data processing- Proper management and process systems are required to process the large volumes of data that the technology itself generates.

3.     Data management- Data depreciates and this has to be accounted for. With such a large scale system, the recurrence and relevance of data have to be monitored so that only relevant information is obtained.

Mitigation:

1.     Proper data warehousing can provide some harmony in data processing and management.

2.     Increasing partnerships between financial and technology-based firms can help cut costs and provide data for both parties. This also has benefits of cross-analysis of data for both parties

Market Opportunities:

1.     Regtech has great potential to enable real-time monitoring of financial markets. Thus it can overthrow traditional concepts about financial regulation.

2.     The increasing shift to pivot more on data has opportunities for enhanced data management. Thus, the institution with the most data on borrowers will be the best place to assess their credit risk and extend credit.

3.     If FinTech can support multiple industries such as telecom, healthcare, infrastructure, then the scope of RegTech will automatically increase as it has a derived demand.

Opportunities for Deloitte:

1. The Consulting wing of Deloitte can partner with financial service firms and the government to offer data management services.

2. They can offer services to corporate clients on strategies to mitigate the risk of non-compliance as they already got the algorithm of existing regulatory non-compliance.

3. The existing large database of Deloitte can be used for analysis and this data analysis has great value in the industry and partnering with existing Regtech firms can provide synergistic benefits.

4. The Risk Advisory department of Deloitte can help existing RegTech firms on Regulatory policies and enterprise-level adoption to the futuristic Regtech evolution.