Top 7 Regtech Use Cases in the Financial Sector

July 28, 2022

Regtech — the Regulatory Technology applied to enhancing and enabling regulatory processes within the financial industry — is now not only commonplace for Fintech companies and regulatory bodies, but has become essential simply because processing regulatory requirements that are constantly updating and aiming to protect consumers is no small feat.

Regtech is seen in other industries as well, such as healthcare, AI, and big data, but it’s most commonly utilized by financial companies through regulatory monitoring, transaction monitoring, reporting, case management, and compliance.

Regtech tools are enhancing financial companies’ ability to run more efficiently, and adhere to necessary regulations more strictly, and there are many practical ways that can be done. Below, we’ll cover the top applications of Regtech in the financial industry, including:

While Regtech solutions are all closely focused on helping with managing, updating, and adhering to regulations, they still cover a wide range of use cases and applications, which we dive into below.

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The Top 7 Regtech Use Cases in the Financial Sector

Based on the breadth of its scope, Regtech has a wide array of use cases and applications in the financial services industry, from identity verification to full-scale transaction monitoring and screening. Regtech solutions greatly aid AML compliance, including adhering to regulations and proper reporting.

These are some of the most common use cases and applications of Regtech in the finance industry.

1. Identity Verification and Management

Digital identity verification has become essential for any modern bank or financial institution. Using a dataset including name, address, date of birth, and other pertinent personal information about an individual, Regtech software will collect, store, and then verify this data using KYC/KYB procedures to ensure you are dealing with a real person, and only that real person.

But the changing landscape of ID verification is a little more complicated than that. One of the most common ways fraud is committed through financial institutions is identity theft, as gaining access to a small set of data points about an individual can remove some barriers to access financial accounts and services.

But with rule-based Regtech tools, additional checks can be added to traditional identity verification. Unlike a traditional bank where you walk in, and the teller sees you holding your card, digital identity verification actually compares real images of you to verified government-issued documents such as your passport or driver’s license. This can all be done without any physical interaction with a customer.

You can use link analysis - or network analysis - to determine the relationships of parties in a transaction (or series of transactions). By understanding the relationships between parties, you can better investigate and more accurately identify if a case is (or isn’t) money laundering.

Regtech tools can also analyze written documents and oral speech in a way that humans can’t; it can verify written text (like handwriting or signatures), as well as speech from a phone conversation, to determine if a person is really who they claim to be.

These added levels of security that come from Regtech tools can authenticate identity verification more accurately and help it occur faster and in real-time to prevent fraud in the moment. Ultimately, Regtech solutions help you perform customer due diligence more effectively so that you only onboard legitimate users.

2. Regulatory Compliance and Change Management

Financial companies must stay up to date with the regulations that apply specifically to them as well as the area(s) they operate within. This industry is at a point where it is no longer possible to do this effectively without the assistance of Regtech tools, especially when your company operates in multiple jurisdictions, or has multiple product lines, as the regulations now change too frequently.

Reactive time to change your operations is also critical, because as soon as a regulation is revised or put into place, you could be in violation of it within weeks — or even days.

Think about when GDPR compliance regulations were put into place; the entire landscape of the online world had to change (and change fast!): how businesses were collecting and using data, what Internet users were entitled to opt out of, and companies’ responsibility for user data all drastically changed overnight.

Suddenly, websites collecting emails for sales funnels — a common practice for years — had strict rules around what they could do with that information, and what they had to offer their users before taking it.

And these same GDPR regulations also heavily apply to the financial sector now that so much of operations are done digitally. Without an automated method of keeping track of regulations that changed, your company could abruptly be in violation of a series of rules that didn’t apply to you yesterday.

3. Regulatory Reporting and Case Management

Regulatory bodies require reporting, and their requirements are all different and ever-changing. In the past, needing to maintain hard copies of all transactions and provide these at the bequest of a regulatory institution made it incredibly difficult to follow regulations and dedicate the necessary resources to stay on top of fraud prevention.

The percentage companies allocated from their overall 2020 budget to regulatory compliance.
Image Source: Global Regulatory Outlook 2020, Kroll

Performing proper reporting and managing cases to strictly follow regulations is one of the biggest challenges facing financial institutions today, and the cost of that compliance is one of their chief concerns. In 2020, 33% of banks said they spend more than 5% of their annual budget on compliance.

Improving data quality with case management software can reduce overall operational costs, allowing you to focus more on actual fraud prevention. 

The Regtech software can store all this data for you — even more than you could possibly store before, and then can present the information in a variety of formats so it can be customized and presented in any format based on the very specific requirements and needs of any regulatory body.

4. Risk Analysis and Management

Risk analysis related to financial crime is difficult to perform because, traditionally, it involves utilizing known information about past infractions committed to be able to identify when those things are occurring now, or are about to occur. There is also the expectation that a diligent financial company could — in theory — prevent future fraud with a proper risk assessment process in place.

The primary issue is that without breaking fraudulent activity down into a series of stages, indicators, typical activities, etc., it’s nearly impossible to make a prediction that it’s about to occur again. And with manual behavior monitoring, it’s difficult to notice the warning signs beforehand, rather than after the fraud has occurred.

According to FATF (Financial Action Task Force) Recommendations, companies must utilize a “Risk-based approach” when dealing with fraud and AML. This also includes additional vigilance based on specific threat levels, such as the country in which the transaction occurs, terrorism financing risk, whether or not you’re dealing with politically-exposed persons, and so on.

And the response must match the threat level, meaning more effort must be put in in these circumstances to validate the source of funds, and must include continued monitoring and due diligence, even if no fraud has occurred in the past.

Regtech solutions can analyze scenarios based on past activity, behavior, and warning signs to actually forecast possible outcomes — including fraudulent activity — rather than just noticing them after the fact. It can also continuously monitor specific cases with elevated threat levels to ensure that over time the same level of vigilance is applied — without requiring additional resources or manual case management.

This actually reduces your risk of being complacent to fraud and helps prevent transactions from occurring in the first place, based simply on a set of standards that Regtech data tools can follow automatically.

5. Transaction Monitoring and Screening

According to FATF Recommendations, suspicious activity must be formally reported promptly, which makes manual monitoring methods a really ineffective way of keeping up with these requirements. Manual monitoring can’t occur in real-time and actually prevent fraud immediately, whereas automated transaction monitoring can.

Rule-based monitoring solutions can be customized to address suspicious activity based on a variety of factors. By tuning these alert thresholds to be in line with regulatory requirements - thanks to a Regtech solution that keeps your platform up-to-date - you catch more fraud being attempted, and can stop it early - before costing you chargebacks and reporting fees.

6. Anti-Money Laundering Compliance and Detection

Anti-money laundering (AML) fines and penalties amounted to a staggering $2.3 billion in 2021. While this was less than the $3.2 billion in 2020, the number of financial institutions being fined went from 24 up to 80. It’s important to remember that even if you stop money laundering in its tracks, you may still need to file suspicious activity reports to stay compliant.

Even something as simple as failing to report a suspicious transaction or not being thorough enough in your investigation of money laundering claims can put you in violation and result in millions of dollars in fines.

Based on regulations, a financial institution must note any suspicious activity, and then have an internal system of compliance specialists investigate these claims for potential money laundering. AML analysts typically spend up to 90% of their time simply collecting the necessary data and information to perform the investigation, and only 10% of their time actually investigating.

AML professionals spend up to 90% of their time collecting data and information for a case, and only 10% doing the investigation
Image Source: Regtech Consulting LLC

Regtech tools and AML technology can crunch this big data at unprecedented rates and in real-time, reducing investigation times and false positives. An automated AML detection system can trigger these alerts based on a series of criteria often present with money laundering, can then weed out false positives to prevent unnecessary investigations, and then reduce the time (and resources) spent investigating possible non-money laundering claims by providing all necessary data to perform the investigation upfront.

See how Intuit was able to reduce their investigation alert time by 65% and automate manual tasks so their investigators had more time to - well - investigate.

7. Fraud Detection and Prevention

Malicious actors can attack your platform in many ways - payment fraud, account takeover fraud, ACH network fraud, social engineering fraud, and more. With so many potential threats, it’s essential to have fraud detection and prevention solutions that identify and stop threats in their tracks.

Beyond this, monitoring solutions will provide alerts when they think a fraud attempt has been successful, allowing you to investigate and follow up with the proper reporting.

Having a high-quality fraud detection and prevention solution allows you to provide the level of security and safety your consumers deserve and keep your company safe from malicious actors (and any fines and penalties). Make sure you stay on top of best practices in fraud so you’re prepared for the most current, dangerous threats.

Download Transaction Monitoring Product Guide

Regtech Use Cases and Applications: Final Thoughts

Despite Regtech being a focused niche - devoted entirely to regulatory technology - there are a surprising number of use cases for Regtech solutions. With so many applicable regulations, and changes happening all the time, it can be difficult to keep up.

It’s best to utilize a Regtech solution as part of your tech stack, helping you stay compliant with AML guidelines. Regtech is ideally suited for use in the crypto space, as it helps make monitoring regulations easier.

Schedule a demo to see how Unit21 can help you stay on top of regulatory changes, and ensure you are always compliant with the most current standards.

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