Since the 2008 financial crisis, government institutions have unleashed a relentless wave of regulations for banks and financial institutions. As the demand to keep up with evolving regulations remains high, companies are looking for solutions that make it easier to keep up with compliance in order to avoid paying hefty fees or legal penalties and to keep their soaring compliance risk management costs low. Significant advances in software applications are making regulatory technology (RegTech) viable solutions for banks to meet the demands of regulatory compliance. Because of advanced technology in AI, big data, cloud computing, and distribution ledgers, RegTech has the potential to lower the cost of compliance, reduce mistakes, and process vast amounts of data with higher precision than manual human resources or legacy systems of financial firms. Here’s a closer look at the key RegTech trends for 2018 and how they’re expected to impact the financial service industry.
Know Your Customer (KYC) laws require banks to know the identity of the customers they’re conducting business with and their potential risks. Verifying identities, assessing risk factors, and confirming individuals are not part of organized criminal activity helps prevent money laundering, funding terrorism, and fraud. Failing to comply with KYC regulations not only puts banks at risk of bad business decisions but also may result in banks paying expensive and hefty fees.
Through 2018, we can expect banks to continue to rely on automated processes to analyze high-risk individuals or entities and verify identities. Running automated checks overnight allows for faster results and allocating human resources to investigate flagged individuals. Programs like CLEAR ID Confirm and WorldCheck can screen lists of potential customers through current and comprehensive databases helping to alleviate manual processes, ensuring higher accuracy and consistent recommendations.
AI for fraud detection
As vast amounts of data become digitized and computing power becomes stronger than ever, it only makes sense to rely on AI for fraud detection. In the past, systems relied on a rigid set of rules to determine the likelihood of fraud. But due to insufficient computing capabilities and limited amount of data available for processing, previous fraud detection generated a high number of false positive alerts. This resulted in wasted human resources, in time and money, investigating legitimate transactions rather than catching actual fraudulent activity.
As AI technology becomes more advanced, it has the potential to be a mainstream solution for detecting fraud. AI is giving computers the ability to learn beyond what they were explicitly programmed to do, allowing them to react to complex scenarios without human oversight. Thanks to stronger computing power, AI can process vast amounts of data to detect patterns that correlate to either fraud or legitimate financial activity. Essentially, AI is allowing banks to process more data, with a higher level of accuracy, translating into cost savings and a more positive experience for their customers.
Cryptocurrency has potentially revolutionized the way we view traditional currency. There are many who are excited at the opportunity around digital currency as well as concerned about the potential risks. Cryptocurrencies have several features that make it a potential risk for money laundering: it’s portable, easily transferred between boarders, secure, has low-transaction fees, and is seemingly anonymous. Virtual currencies, such as Bitcoin, do not link any identifying information to an owner’s digital wallet. Then there are some virtual currencies that are 100 percent anonymous, such as eCache. There’s concern that this will make money laundering and hiding illegally obtained funds easier for criminals. In an unregulated, decentralized system how do users know the history and origination of funds?
Cryptocurrencies have their own built-in features that have the potential to prevent money laundering – blockchain technology. Blockchain is a public distribution ledger that records each and every transaction which is then independently verified. Once a payment is confirmed, it cannot be altered. This makes every payment to a virtual wallet account traceable. Another desirable feature is that the distribution ledger is updated in real time, so targeting criminal activity can be more cost-effective and happen more quickly. With the right technologies in place, analysis of digital transactions and activity can identify and stop suspicious activity with even better precision than current anti-money laundering monitoring.
Investment in RegTech expected to grow
It should come as no surprise that financial institutions will continue to invest in RegTech solutions. As governing institutions continue their ceaseless bombardment of changes and the operating cost of compliance remains high, banks look for solutions to stay current with compliance laws and keep their operating costs low. According to a study in the Northwest Journal of International Law and Business, $200 billion in fees have been levied against banks for being out of compliance. Financial firms are adding human resources to keep up with the relentless changes to regulations. Citi Bank has 30,000 staff dedicated to managing compliance. However, even by adding these new resources, companies cannot keep pace with the constant change. The manual process leaves firms exposed to risk of human error and misinterpretation, as well.
RegTech has the potential to alleviate much of the pressure on financial institutions. Investment in RegTech is expected to grow to $120 billion by 2020, according to Reuters. For the first time since sweeping reform, RegTech could allow financial institutions to be proactive in their compliance management rather than reactive and having to pay hefty fees. It makes perfect sense for financial firms to invest in the automation of compliance processes, making it more efficient and cost-effective in the long term. This will free up money and resources for banks to allocate to other areas of their business, ultimately allowing them to provide better services for their customers.
What’s next in the evolution of RegTech?
As technology continues to evolve in the financial industry, there are a number of exciting changes to RegTech on the horizon. Whether it’s making identification verification easier for customers, using AI to detect fraud, or blockchain technology to stop money laundering, investment in RegTech isn’t expected to slow down anytime soon. Banks have only begun to explore RegTech’s potential to help them keep up with the high-demand of continuous financial regulations and we can expect to see more innovation in the years ahead.
CLEAR online investigation software makes it easier to locate people, businesses, assets and affiliations, and other critical information. With its vast collection of public and proprietary records, investigators can dive deep into their research and uncover hard-to-find data.