Compliance costs for community banks have skyrocketed in the years following the Dodd Frank Act. In the past two years alone, costs are estimated to have increased by almost $1 billion, to $5.4 billion in 2016. The median-sized bank in this country has only 44 employees; however, as of August 18, 2017, the total amount of new and proposed regulation stemming from the Dodd Frank Act totaled 26,399 pages. There is simply not enough time for bank staff to read and determine what rules apply; make the necessary changes to policies, procedures, and IT systems, train, and test for compliance—and have the time and resources to meet the needs of their communities.
Regulatory costs for banks largely stem from time consuming manual processes necessary to comply with ever increasing regulation. However, this area is ripe for digital disruption. Regulatory technology, or regtech, refers to the application of technology to ease banks’ regulatory compliance burden. Just as fintech is being used to digitize customer-facing financial services, regtech promises to digitize back-office regulatory compliance, simplify regulatory reporting and empower staff to better assess risk and monitor regulatory compliance.
Regtech will not supplant banker decision-making. Instead, it will act like a knowledgeable colleague that can provide insights and make connections a compliance officer might not recognize otherwise. Regtech will empower compliance staff to delegate menial tasks to technology, allowing them to focus their energy on more important risk related issues.
The application of regtech is still in its infancy. Some ideas require the buy-in of regulators and the maturation of technology, while others are as simple as providing better information to compliance officers. However, regtech promises to be just as transformative a tool as consumer-facing fintech solutions.
Understanding RegTech is a supplement to the Fintech Playbook.