FinTech is the new technology that financial institutions use when serving their customers. FinTech has permeated wealth management and RegTech is following suit. The tech revolution, however, has only just begun and the next development is SupTech.

With the widespread use of mobile devices such as smartphones, laptops and tablets, FinTech applications (or apps) can be used in virtually all financial transactions. Two–thirds of consumers between the ages of 18 and 29 have mobile phones and bank with them.

HNW customers can settle wire transfers, any business-to-customer or B2C transactions, and even grocery shopping and online purchases using FinTech. As the US Federal Reserve has said, FinTech puts financial change at consumers’ fingertips.

FinTech’s limitless opportunities

FinTech can support personal finance through online budgeting and the tracking of expenses and income. Automated savings applications help consumers plan for retirement and college. Financial advisors use FinTech to follow investment strategies and to monitor portfolios.  

FinTech improves the lending process by reducing the cost of underwriting through the automation of the credit application process. That process includes reviews of credit applications, the monitoring of credit scores and the collection of financial documents.   

Lower underwriting costs result from faster loan-processing turnaround times and fewer human errors. The underwriting process is also less labour-intensive, which can cut operational costs.

A FinTech firm can create apps that conform to credit standards that are in line with the relevant bank’s risk-management policies, helping that bank to observe trading limits more efficiently. Other applications include position monitoring (surveillance) in respect of capital market transactions, leading to the monitoring of trading-limit violations in real time. As a result of FinTech, a financial institution can manage its credit and trading policies holistically and more efficiently, thereby reducing the overall risk to its balance sheet.   

FinTech can lead to more and better sales opportunities. Any financial institution can use apps to step up its marketing efforts and target potential customers. Whether it wants to cast a wide net in the hope of attracting new clients or whether it wants to enter ‘niche’ markets, FinTech might be able to help it find prospective customers and improve the process by which it ‘onboards’ new clients.

With today’s widespread use of information technology throughout society, FinTech has the potential to affect nearly every financial transaction, transforming the ways in which consumers, businesses and financial institutions interact and transact.

RegTech: the regulatory spin-off From FinTech

Just as FinTech helps banks use technology to interact with customers, RegTech helps banks use technology to meet regulatory requirements.

RegTech uses various types of technology, such as machine learning and artificial intelligence, to establish enterprise-wide data governance and reporting. These new approaches are replacing the current manual modelling and reporting processes.

With the regulatory landscape in a never-ending state of flux, RegTech helps institutions to remain compliant with such crucial legislation as the US Bank Secrecy Act 1970, with its innumerable know-your-customer and suspicious activity reporting rules. RegTech also simplifies the data-reporting requirements imposed by such by-products of the global financial crisis as the Basel III accounting standards, the US Federal Reserve’s Comprehensive Capital Analysis and Review and the European Union’s second Markets in Financial Instruments Directive.

How RegTech helps your institution comply

This occurs in the following ways.

• Reductions in time needed for ‘onboarding’ clients and identifying threats from money launderers and terrorist organisations. As a result of digitising the ‘know your customer’ or KYC process, firms are adhering to regulations more consistently because the process is less manual and time-intensive.
• Fewer fines and lower litigation costs are possible when RegTech apps are in use. With fewer compliance problems within their walls and better compliance monitoring, financial institutions reduce the reputational risks that always stem from data- or cybersecurity-related disasters.
• Financial institutions can find it faster to adapt to regulatory changes with RegTech because they can monitor such changes in real time. As a result, they can embed them in their internal policies on an enterprise-wide basis in a fraction of the time it takes them to do it manually.  
• RegTech techniques can improve the ways in which companies analyse data, taking a more in-depth look at this-or-that client’s financial history both in-house and elsewhere.  
• Regulatory reporting times improve with RegTech. Just as this software helps firms ‘onboard’ new clients more easily, it also improves the efficiency and speed with which firms report suspicious activity to regulators and financial intelligence units. Once a firm has sent a suspicious activity/transaction report (regarding, for instance, fraud, money laundering and terrorist funding) off, RegTech helps it monitor further suspicious activity. This can ultimately improve its chances of avoiding or minimising regulatory and/or reputational damage.

The tech revolution has just begun!

FinTech helps consumers and businesses to monitor their financial transactions, to save and to invest. RegTech, on the other hand, helps institutions to monitor their clients' activity for regulatory problems. FinTech reduces the time and money that banking clients have to spend on their financial transactions, while RegTech minimises the time that firms spend and the operational costs they have to pay when meeting (and monitoring their compliance with) regulatory standards.  

IT has leapt forward in recent years. Despite rumours to the contrary, however, its advance does not always 'disrupt' businesses. It has helped customers, regulators and banks transact (and generally deal more easily) with each other and has also offered banks opportunities to do various things better. Technical innovations will help financial institutions improve their operating models rather than completely replacing them.

Technology developed in isolation from bank operating models does not go far enough towards solving the problems that face today’s markets. The ultimate goal of FinTech and RegTech ought to be to improve collaboration and communication between financial institutions and regulators, thereby benefiting both.

Meet the newest tech: SupTech

The point of supervisory technology – a term I first encountered in 2016 – is to make regulators more efficient and help regulated institutions benefit from that. Imagine a capital markets desk at a financial institution where a trader is about to press ‘enter’ on the keyboard so as to initiate a market position. A message suddenly pops up on the computer screen from a regulatory agency, notifying him that he is not complying even before the trade has begun.

With the emergence of SupTech, that day is closer than you might think.

As we have said, RegTech helps institutions remain compliant, improve risk management policies and reduce compliance costs by digitising data. SupTech has emerged to help regulatory agencies digitise data and their operational procedures and to automate their processes. As a result, SupTech may someday be able to monitor a financial institution’s transactions or client’s data to prevent non-compliance or, at the very least, to respond to a rule being broken in far less time than today.

How SupTech could change the regulatory landscape

Many institutions send historical data about transactions to their regulators in different reporting formats and this makes the regulators’ task of gathering and analysing data onerous. Since the financial crisis began in 2008, regulators have been asking for more and more detailed data about specific transactions, trades, loans, market positions and other things. Manual processes are often costly for both the institutions and regulators.

SupTech streamlines the collection of data by automating the manual reporting process at financial institutions. Also, reports from institutions are standardised, which hopefully presents supervisors with data of consistent quality. As a result, they spend less time and money collecting and analysing the data. They can then spot rules being broken (and uncover illicit activity) at an earlier stage.

Often, regulators levy fines for non-compliance because firms fail to report their transgressions on time. If a financial institution is bad at monitoring and reporting, it can be months after a financial crime has occurred before it spots it and tells the regulators. By that point, the damage is done and a fine is almost certain.

When SupTech takes hold, however, the collection and analysis of data will be streamlined and standardised all over the financial sector, improving response times and lowering costs.

Real-time regulatory access to information at companies is another benefit of SupTech. At the moment, an employee on a trading desk receives a pop-up message on his computer screen if the transaction he is about to activate is going to result in a credit violation or a trading-limit violation. With SupTech, his regulators can receive a ‘violation message’ that is based on parameters that they have already set for the type of institution and type of transaction concerned. This helps them to see a complex picture more clearly, because savings institutions are not regulated in the same way as commercial banks and even commercial banks of different sizes have to follow different rules.

With SupTech, an institution can custom-build a monitoring system to suit its size and type. It can then use it to notify its regulators of its failures to comply with the rules. By having access to its data in real time, the supervisors can spot transgressions in real time.

SupTech also holds out the promise of fewer on-site audits. At the moment, regulators have to visit firms to audit them and work out whether they have broken any rules. It often transpires that the transgressions occurred far in the past. With the emergence of SupTech, parts of the audit can be digitised and therefore done remotely, reducing the regulators’ costs and increasing the frequency and quality of their communication with institutions.

Additionally, regulators usually want firms to give them data through the use of templates. This is not much help to either firms or regulators if they want to customise data and create customised 'indicators' to support advanced analytical studies. When firms are obliged to use a variety of different templates for various reports, inconsistencies between these 'data indicators' are likely. This leads to errors and 'data points' (bits of information) being miscalcuated. Many regulations require firms to use different sets of templates when sending their reports to the regulator, while the data that is going into one template often has to go into others, causing duplication of effort and helping the cost of compliance to keep soaring upwards. Suptech can enable firms to collect data in a granular way without the strait-jacket imposed by templates. It can give regulators the freedom to customise the 'indicators' of activity for which they want to look, thereby ensuring that banks are sending them consistent data in a more harmonious way. This will eliminate the need for banks to report the same data over and over again for different templates.

Lastly, SupTech allows a regulatory body to notify an institution of a necessary capital requirement increase, allowing it to increase the capital it holds before it breaks any rules and before quarter’s end.

Risks inherent in SupTech

With new technology comes uncertainty and a new array of risks and problems. The risks include the following.

• Cyber-attacks from terrorist organisations and rogue nations. Hacks are more likely in the early phases of development before the firm in question trains all its staff and works the bugs out of the system.
• System-wide failures. Just think of a SupTech version of a ‘flash crash.’
• Over-reliance on technology and complacency on the part of both regulators and banks. As IT plays a larger part in the regulatory process, there is a risk that regulators and employees at firms might pay less attention to their jobs and fail to spot compliance failures or financial crimes.

Just as RegTech has improved the monitoring and reporting process for institutions, SupTech has the potential to help regulators improve their efficiency by standardising the reporting process and streamlining the way in which they collect and analyse data. The result could not only be lower costs for them, but also fewer fines for institutions as co-operation flourishes between regulator and regulated.

* Breana Patel can be reached on +1 646 384 7886 or at breana@bonova.net