RegTech and KYC

RegTech & KYC: Over-selling, under-delivering…Is this creating more risk in the market?

In recent years, the banking industry has been inundated with regulation. From AML, to EMIR, Dodd-Frank, MiFID II, to FATCA & CRS and enforcement, the volume of new regulation has been unprecedented. One of the most significant side-effects of this is that large global banks have begun looking at how they streamline compliance and the ever-changing regulatory landscape that impacts onboarding times and time to transact. Innovation in RegTech is rising with new emergent start-ups and leading technology providers investing and working with the industry on solutions. The most sophisticated global banks are looking to eliminate silos, eliminate risk and drive customer centricity as part of a larger digital transformation agenda to further drive competitive advantage. Siloed applications have only increased costs and provided limited benefit to complex financial institutions. Innovation in RegTech has been a driver in the market to reduce costs and mitigate risk due to complex regulatory requirements. So how do you make sure you choose the right RegTech solution that is essential to mitigating your long term risk and ensure that you aren’t being sold a ‘lemon’? Here are a few things to consider:

1. RegTech: This is a term which we’re seeing used increasingly in the industry and it’s important to note that it has the word ‘tech’ in it for a reason. RegTech needs to have an underlying technology platform that can not only scale but be implemented rapidly and easily extended.  The technology needs to be proven and not a bunch of ‘spaghetti code’. Truly robust KYC applications take time to evolve and develop, through tried and tested learning at large global banks, and other complex institutions. To achieve this, you need to have in place a proven architecture that has been validated by implementations in 40-80 countries and across hundreds of legacy systems. The technology also needs to be agile to meet ever increasing regulatory demands. Hard-coded applications, simply don’t work anymore, because they only create more silos. Truly transformational RegTech solutions should not only provide optimized target operating models and smart regulatory rules across a myriad of regulatory requirements but also the ability to modify and change rules based on the unique risks of the bank’s ability to rapidly implement to meet increased complexity.  They also need to reduce the costs of onboarding, through end to end client lifecycle management technology: sales, onboarding, KYC through to customer service through to robotics and AI with front to back office transparency and orchestration. 
2. Robotics & AI: Many technology vendors, with the current buzzwords of AI and Robotics floating around will use that in their marketing campaigns but in reality robotics is a ‘feature’ that allows for smarter and better efficiency ‘within’ the RegTech and client lifecycle management/onboarding technology. It should be inherent. Ask the vendor to prove how they are using robotics, where are the efficiency gains and what are the proven benefits?  Robotics outside of a truly robust KYC application provide limited advantages and provide a band-aid to a much more strategic approach to remediation and go-forward efficiencies across the client onboarding and KYC lifecycle.
3. Investors:  A lot of RegTech start-ups are innovating faster than ever in the hope of an IPO. In reality there were only 128 IPOs in the US in 2016, so it’s important to be realistic with your expectations.  Some very significant companies haven’t IPO’d yet, including Uber. The innovation by proven long standing companies has just started to pick up adoption with KYC utilities, which still had to go through the full innovation, adoption and growth cycle, which they still are.  These KYC utilities are innovating and providing smart tools to the market to optimize KYC data collection and validation to the industry. The adoption and value to banks will come. At the end of the day, they are backed by companies that are proven and are providing a service to the industry for long term benefit.  The use of these utilities within proven Client Lifecycle Management technologies to further optimize their data and innovate and will undoubtedly provide a benefit to large global banks. We are all solving the issue together. They have the financial backing to innovate and are looking at driving business benefit to their clients.     

Some of these start-ups will make it, others won’t with their ‘exit’ strategy to ‘sell’. Many RegTech start-ups, backed by VCs and Private Equity firms, will ‘over promise’ and ‘under deliver’, promising the ‘silver bullet’ of RegTech to drive higher valuations in the market with the promise of an IPO to the end client and the promise to the bankers of their IPO business.  Investors want to make a profit and they want their money back. RegTech start-ups in turn will create noise in the market to increase their perceived value through marketing and press releases, in some cases putting out ‘fake news’. To IPO is not that easy and it’s the promise to the investment banker’s vs C- level and compliance side of the bank that creates a risk to the bank and a ‘red flag’ to regulators.  Bankers will sometimes make regrettable decisions with the promise of a profitable business deal vs the long-term risk to the bank. Going back to point one,there needs to underlying technology and the technology needs to scale and deliver. The RegTech solution needs to be part of a larger transformational strategy that will provide customer centricity, competitive advantage and truly eliminate regulatory risk, then the unfounded promises of an IPO deal.    

4. Regulatory risk and ethics:  The goal of regulation is to make the markets safe, investors safe and reduce anti-terrorist financing and anti-money laundering risk. Banks want to avoid fines and regulatory scrutiny. Companies are focused on ethics, and the impact of regulation is in the billions now.  The goal of RegTech, in theory, is to help banks stay compliant much more efficiently and mitigate long-term risk.  Choosing the right RegTech solution needs to be based on the ability to mitigate this risk and further prove to the markets and regulators that the best choices were made to manage complex regulatory requirements with full auditability and control. When banks may make poor decisions or in reality select people do, making the right decisions are much easier in the current ethics climate. Banks are allowed to admit their mistakes as there has been an increased focus on transparency. We see more banks working directly with regulators and notifying them upfront. The collaboration between regulators and banks is increasing. 

5. RegTech and Digital Transformation:  The market has changed. Where, 5 years ago, banks wanted to only build their own in-house solutions using smart BPM platforms, today they are looking at truly robust KYC and Client Lifecycle Management Applications. Just like RegTech emerged in the ‘start-up’ world, the largest BPM/Case Management vendors have invested heavily in building industry-leading KYC and CLM applications, including robust regulatory rules with ex-regulators and legal teams, similar to what Thomson Reuters, DTCC, Swift and Markit have done in the KYC, tax and regulatory utility space. The foundations work and the natural extension provides trusted technologies and providers to deliver to large complex banks and continue to innovate. RegTech needs to further eliminate siloed applications. It needs to be part of a larger customer and sales transformation strategy that can scale globally and across lines of business from sales, onboarding, KYC, credit, operations through to customer service. Smart, scalable, transparent and proven solutions drive long-term business benefit in a digital world.