Since the 2008 financial crisis, private banks have been confronted with a growing flow of regulatory requirements relating to customer identification, the fight against money laundering, the fight against the financing of terrorism, prevention of corruption, compliance with tax compliance, etc. In other words, regulators require banking institutions an ever-deeper knowledge of their customers (KYC).
These compliance requirements impose a higher and higher cost on banks, not only because of the human and technical resources they require, but also because of the risk of sanctions (fines) and loss of reputation that they induce. This explosion of compliance costs is, according to many banking leaders, a source of disruption.
In addition, compliance requirements vary widely from country to country. The cost is therefore even greater for private-sector banks that have customers in many countries and / or perform multiple cross-border operations. This particularly impacts the Swiss financial center, which is the world leader in cross-border wealth management.
This increase and complexity of due diligence requirements also have an impact on customers because opening and managing an account requires them to provide more and more information and documentation, which tends to slow down these operations, this information must be carefully checked and validated.
However, the development of new technologies applied to finance (fintech) seems to offer solutions to these problems. These technologies can enable banks to reduce compliance costs and risks, save time, and facilitate relationships with their customers.
Thus appeared a new dynamic field of activity within fintech: that of Regtech (contraction of regulation and technology), covering all the technological tools used to facilitate compliance with regulatory requirements by stakeholders financial. Compliance management systems are just one example of Regtech solutions making a major difference in many industries. Compliance management solutions are now a common sight in the healthcare and financial sector.
Using machine learning
Among the tools used by Regtech, we can mention the development of artificial intelligence, including using machine learning, the development of software capable of processing natural language, the constitution of huge databases, algorithms in to extract, aggregate and analyze very large data sets (big data), data mining and the development of behavioral data analysis tools to detect weak signals of fraud, regulatory reporting tools, the creation of digital identities, the automated monitoring of regulatory data, biometrics, cryptography, blockchain (decentralized and highly secure digital database).
In other words, Fintech, in cooperation sometimes with banking players or service providers, has developed software tools and databases that can facilitate the due diligence operations that are imposed on banks. Some service companies offer databases (KYC utilities) to ensure better information sharing between financial institutions. These instruments, however, only cover a limited number of partners and their reliability is still widely debated. The authorities of Singapore have engaged, in close collaboration with the financial industry, to create a national database that will allow the accurate and secure identification of clients of financial institutions. Such moves can help businesses ensure better compliance, but there are some concerns related to privacy which may prevent us from using the same types of methods in other countries. Singapore is overall very heavily regulated, and we cannot be sure that other countries will appreciate a move to create a centralized database.
Constraints and limits
The various initiatives that rely on the Regtech are certainly promising because of the innovative nature of the techniques used. However, they are confronted with several constraints and limits.
- To meet the KYC requirements imposed on them, banks can only rely on an electronic identification of their customers to the extent that the State to which they are subject has adopted the legal provisions setting out the conditions. recognition of digital identification.
- In a globalized financial world, efficient use of digital identifiers and KYC utilities requires the creation of common and therefore shared databases. However, the sharing of customer information between banking players faces serious limitations due to the privacy and data protection rules that exist in most countries.
- The creation of an entity common to the institutions of a financial center to support various undifferentiated administrative operations would certainly bring significant savings. It would, however, involve overcoming many obstacles (diversity of priorities of banking players and systems already in place, autonomy of each in terms of risk assessment, etc.), as evidenced by the recent debates in Switzerland around the idea of a "superbank".
- Regtech banks' use of new compliance technologies does not relieve banks of their responsibility for due diligence and the use of the data collected. It is ultimately up to the banks and alone to assume the risks that may be involved in using these technologies.
Despite these constraints, Regtech solutions are expected to take an increasing role in the compliance activities of banks. In the future, they will certainly constitute an important element of competitiveness for the financial centers and for each of their members.
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