Fintech & regtech usage today

According to TRRI’s survey report, which surveyed global financial services institutions about their fintech and regtech planning and use, fintech and regtech is being utilized for a wide variety of reasons. For example, in fintech, uses involving information/data security were cited by one-quarter of respondents, while uses involving payments (22%), customer relationship management (21%), and credit risk analysis (16%) were also ranked as top reasons for use.

In regtech, meanwhile, cyber resilience was cited by 20% of respondents, while compliance monitoring (16%), financial crime/anti-money laundering/sanctions (14%), and onboarding (14%) also were ranked as the top reasons for usage.

This wide array of uses for fintech and regtech may be not only because of the flexibility of today’s tools, but also because of the sheer number of technologies falling under the fintech and regtech banner. For example, fintech comprises, there were 12 different use cases capturing at least 5% of respondents. Indeed, Columbia University a “catch-all term” that includes “software, mobile applications, and other technologies created to improve and automate traditional forms of finance for businesses and consumers alike.” This includes pieces of technology as disparate as mobile banking and payment services, wealth and financial management services, and e-commerce platforms (including for cryptocurrency). Regtech, meanwhile, is often seen as a , offering its own variety of technologies including compliance management, regulatory reporting, and risk assessment tools.

With all these potential pieces of technology and use cases, it’s not surprising to see that budgets for these solutions and the skill sets needed to operate them are growing in tandem. Among the survey respondents, 42% said their budgets for fintech solutions were growing, while 38% said the same for regtech solutions. Meanwhile, just 10% and 13%, respectively, said their budgets for those solutions were shrinking, while the rest either said budgets were static or they did not have a set budget for fintech/regtech solutions.

To operate these solutions, more than half of respondents (57%) said they have had to widen skill sets within their risk and compliance functions to accommodate fintech solutions. Nearly one-quarter (22%) of respondents reported going even further and investing in specialist skills for fintech tools, including 38% of all respondents in the U.S. While fewer companies have invested in specialist skills for regtech tools (11%), nearly half (47%) still reported needing wider skill sets to accommodate these tools.

Taken together, it’s clear that the prominence of fintech and regtech tools within today’s financial institutions is growing. In many places, governments are promoting this change as well. “The increasing prominence of fintech and green and sustainable finance have been a game changer to the global financial industry,” said Arthur Yuen, deputy chief executive, Hong Kong Monetary Authority, in June 2022. “Financial institutions across the globe are actively looking for experts with relevant knowledge and skillsets to help develop innovative fintech solutions or sustainable investment products, [and] manage the climate risks.”

Regulators on the line

Yet, even as governments see the benefits of fintech and regtech usage today, their own regulators are also taking a closer look at how those fintech and regtech platforms are operating. “Technological solutions offer the possibility to deliver tremendous benefits and we should be ready to harness them,” said Elizabeth McCaul, member of the Supervisory Board of the European Central Bank, in . “But any technology solution needs to be buttressed by three pillars: an appropriate regulatory framework, sufficient supervisory oversight and […] a deep understanding […] not only of the potential but also the limitations and risks of new technologies.”

In the TRRI report, some financial institutions report that they have already had contact with regulators concerning their use of these technologies. More than one-quarter of respondents (28%) said they had already spoken with regulators about fintech, 57% said they had not, and 15% did not know. For regtech, 21% said they had spoken with regulators, 59% said they had not, and 20% did not know.

The report, however, also broke out the responses from the largest global systemically important banks (G-SIBs). Among this population, as many said they had spoken to regulators as had not — 43% of respondents, while the rest said they did not know. That half-and-half figure was the exact same for both fintech and regtech solutions.

While it may be unsurprising that the largest financial institutions are the ones more likely to be speaking to regulators, the report noted that G-SIBs are often a harbinger of future technology trends. In this instance, it could mean that regulators are gaining familiarity with fintech and regtech tools, with an eye toward expanding their purview to the wider financial industry in due time.

“More widespread use of fintech/regtech by regulators themselves means that firms of all sizes would be well-advised to initiate regular, in-depth conversations with their regulator on the use of fintech and regtech,” the report proposes. “This might help bridge the apparent disconnect between firms and their regulators.”

Regulators and lawmakers alike have already indicated an increased interest in fintech, particularly following the collapse of crypto-exchange FTX and the related cryptocurrency fall-out. In the U.S., CFTC Commissioner Kristin N. Johnson , noting, “I am hopeful that Congress will identify a whole-of-government approach to ensure that we prevent schemes that rely on regulatory arbitrage or take advantage of the regulatory gap that currently limits our visibility into digital asset trading markets and stymies our ability to adopt rules necessary to effectuate our mission in these markets — to protect customers, ensure market integrity, and foster fair, orderly, and transparent markets.”

Congress may very well answer the call. Around the same time as Commissioner Johnson’s call to action, U.S. Sen. Sherrod Brown (D-Ohio), Chair of the Senate Banking, Housing, and Urban Affairs Committee, , “It is crucial that risks in this area are contained and do not spillover into traditional financial markets and institutions, and we draw the correct lessons regarding customer and investor protection.”

Ultimately, fintech and regtech can provide a host of benefits to an organization, including improved efficiency and speed of processing, improved data management, better risk monitoring and more. These solutions may even become a necessary requirement for the largest financial industry firms.

However, those institutions exploring their use would do well to not only examine the technical and operational aspects of integrating these technologies, but the potential external regulatory risks that these tools can bring as well.

This downturn was reported in , published by ¶¶ŇőłÉÄę Regulatory Intelligence (TRRI). The report quoted statistics from Innovate Finance’s , which found that in the first half of 2022 the total capital invested in fintech worldwide reached $59 billion. This was flat year-on-year, with 3,045 deals completed; fewer than the 3,401 deals in the first half of 2021.

The 2023 Fintech/Regtech survey found further evidence of a financial downturn in the sector, reporting that enthusiasm for fintech was waning, with a fall in the number of people feeling extremely positive about the sector. Overall, this year’s survey reported that 15% of respondents were extremely positive about fintech, compared with 31% last year.

Economic uncertainty

The profile of the fintech marketplace appears to be changing as smaller operators are more likely to fail, leaving larger firms with a greater market share. Fintech firms are making employees redundant, losing vital skills and experience, as the economic situation remains unstable.

Further, prices of fintech solutions may well increase as the number of fintech firms declines and the capability to innovate diminishes. Such developments will be unpalatable to potential investors and buyers alike.

In the last few years, TRRI’s fintech surveys have highlighted the popularity of applications in many disciplines. This year’s survey showed the top uses include credit risk analysis, information and data security, and customer relationship management.

Demand to automate operations has not dissipated, but the challenges to implementation have grown. The economic environment has made it harder for firms to deploy fintech applications in a cost-efficient way, and fintech firms have become less able to innovate, reducing the choice of available applications.

Other reasons why fintech has diminished

Susceptibility to fraud is another of the main reasons why fintech has become less attractive. Fintech applications’ exposure to fraud has increased in recent years; and this, coupled with a rise in the number of cyber-security breaches, has placed pressure on fintech firms to consider security and control elements. Fraud victims lost ÂŁ1.3 billion in 2021 alone amid a surge in online fraud, with a nearly 40% rise in authorized push payment scams, according to UK Finance.

Fintech applications can be powerful tools which help reinforce money laundering controls, although fraudsters also see fintech applications as conduits for laundering activities. The greater number of transactions that fintech applications can promote, coupled with the continuous flow of money, especially across borders, and the potential for anonymous account-holding, are all characteristics which hold huge appeal for money launderers.

Financial services regulators have placed the onus on firms to have effective anti-money laundering (AML) controls in place, including for many of the disciplines that fintech applications purport to address, such as customer due diligence, know-your-customer checks, and transaction-monitoring arrangements. In fact, regulators have fined several financial services firms for failures in these areas. Regulators are also concerned that fintech applications may increase the risk of harm to customers and investors or reduce firms’ operational resilience or systemic financial stability.

Crypto-assets, cloud computing, and payment systems have all been identified as needing to be brought inside the regulatory perimeter. These areas are now subject to regulations or are in the process of being regulated. This imposes another level of complexity on fintech applications.

Finally, the availability, or otherwise, of skilled staff and indeed firms’ ability to afford staff with the relevant knowledge may also be acting as a brake on the development of new fintech solutions or the purchase of existing applications.

The 2023 Fintech/Regtech survey identified a dearth of skills as one of the greatest challenges to the growth of fintech, with half of corporate boards surveyed reporting that they had had to widen their firms’ skill sets to accommodate developments in innovation and digital disruption. The need for additional skilled resource was balanced by the fact that some fintech firms were laying off workers, however.

Challenges for risk & compliance officers

For compliance officers, there is different perspective on the risks to which firms are exposed, highlighting the need to develop comprehensive yet flexible governance arrangements. This places greater focus on firms’ risk management frameworks, of course, making it more important to get third-party on-boarding processes right. Risk & compliance officers need to ensure that the risk of a fintech failing is fully explored when on-boarding a supplier.

The on-boarding process should also assess the skills and resources available to the fintech firm, and its plans to recruit or develop the necessary skills. Further, compliance officers need to ensure that, where there is a regulatory reason for engaging with a fintech application, all the relevant rules are covered and that the output from fintech solutions can be used to demonstrate compliance both internally to senior management, and externally to regulators.

Also, the adequacy of business continuity arrangements and exit strategies needs to be fully evaluated to ensure that, should the fintech no longer be unavailable, the detriment to customers, shareholders, and the wider financial services sector is offset.

Firms that have solid risk and governance frameworks that provide for the regular review and updating of risks may already have managed the risks associated with a changing fintech marketplace. It would, however, be prudent for firms to reassess their relationships to prevent the market downturn from disrupting the supply of services and placing the firm at greater risk of financial loss, customer detriment, and regulatory scrutiny.

You can download TRRI’s 7^th report on here

On the other hand, there are signs of a slowdown in the growth of the fintech sector. In the first half of 2022, for example, the total capital invested in fintech worldwide reached $59 billion, which was flat year-over-year, according to Innovate/Finance’s . What’s more, there were 3,045 deals completed in the fintech sector, fewer than the 3,401 deals in the first half of 2021.

The slowdown is echoed in the findings from this year’s TRRI survey. There was a fall in the number people feeling extremely positive about fintech and regtech. For fintech overall, this year’s survey reported that 15% of respondents were extremely positive compared with 31% last year. For regtech, 15% of respondents felt extremely positive compared with 26% in 2021. What’s more, less than one-in-ten (8%) of respondents from G-SIBs felt extremely positive about fintech.

It may be unsurprising that respondents felt less positive about innovation and digital disruption given the challenges that firms must address across the board. This year, respondents said that the availability of skills (20% fintech, 16% regtech) and regulatory approach (14% fintech, 18% regtech) were the most significant challenges anticipated in the next 12 months. For G-SIBs, concentration risk and third-party providers ranked highest among challenges for fintech (15%), whereas cultural approach (15%) was the biggest challenge facing G-SIB regtech users. Data governance and cyber resilience also feature highly in the list, with other areas including financial crime and operational resilience also prominent.

Regulators are also adopting technological solutions to help with their supervisory roles and the management of large volumes of data. That means, firms need more interaction with regulators on fintech and regtech. More than two-fifths (43%) of G-SIBs reported having spoken to their regulator about fintech and regtech. This contrasts with responses from other financial services firms, nearly 60% of which reported that their regulator had not spoken to them about the use of technological solutions.

Despite this current slowdown and waning of enthusiasm, the future of the fintech market remains optimistic, the report observes, recommending that financial services firms should continue to invest in technology, IT infrastructure, and associated skillsets. To maximize the potential of technological innovation, firms must continually reassess their technological needs and then invest in solutions tailored to the activities of their business.

The Fintech, Regtech, and the role of compliance survey has, in its lifetime, attracted more than 3,000 respondents. Participants from all sectors of financial services — from globally significant banks to technology start-ups — took part in this seventh survey. The survey results are intended to help financial services firms with planning, resourcing, and direction, allowing them to benchmark whether their approach, skills, strategy, and expectations are in line with those of the wider industry. The report specifically focuses on areas that directly affect the compliance function.

The report also assesses the extent to which firms are turning the technological challenges they are now facing into opportunities, embracing new ways of working and navigating the evolving regulatory approach.