The increased synergy between RegTech and Fintech would also result in the emergence of entities that operate at the intersection of both these companies.
The evolution of FinTech
When it comes to the service industry, technology has always been deeply intertwined with how business was carried out. For companies that operate in the domain of Finance, this has always been the case. Financial Technology, or FinTech as we have come to know it might have entered our collective lexicon only recently but has been around for a lot longer.
To keep things simple, let us categorize Fintech chronologically into two distinct phases, with the marker being the 2008 global financial crisis (henceforth referred to as the GFC). The pre-2008 paradigm covers everything from the laying of the transatlantic telegraph cable to the evolution of digital communication systems that enabled much of modern finance to take off in the manner that it did. The post-2008 paradigm witnessed the invention of personalized financial services, most of which were spearheaded by young startups that actively sought a ‘technology first’ approach to their operations.
The key thing to remember here is that with increased technological intervention comes greater complexity, especially when it comes to regulation and compliance. The GFC exposed the world to the cracks in the current financial system and regulators around the world tightened the noose around the industry so as to prevent such a disaster from happening again. It is this very problem of regulation and compliance that spawned yet another movement: Regulation technology (RegTech).
RegTech: the ultimate catalyst
Unlike FinTech, RegTech is not spoken of in the same manner and features a lot less prominently in mass media as it is fundamentally a B2B operations whose entire client base is restricted to the BFSI industry. Much like FinTech, RegTech has also undergone multiple changes over the years, which we shall examine from both sides of the GFC.
Pre-GFC RegTech was mostly led by large financial institutions that sought to streamline and improve regulatory processes. This was done by integrating technology within their internal processes to ensure that they could curb rising compliance costs and complexity. The most direct manifestation of this is the Basel II Capital accord, which levelled the international regulation field. The post-GFC RegTech space was marked by an attempt to fit well within the changes that were a result of an overhaul in the global financial regulatory system. A prominent feature was the need to mirror the increased levels of digitization that were becoming apparent within the markets that they were operating in.
Up until recently, both Fintech and RegTech were evolving independently of each other and simply worked in parallel to ensure lesser frictions within the financial landscape. However, as both FinTech and RegTech begin to mature and start coming into what is widely regarded as ‘FinTech 3.0 and RegTech 3.0’, they can no longer just work from their respective silos. Both industries need to foster increased levels of collaboration so as to identify and address prospective avenues that require reformation at the fundamental level.
Two sides of the same coin
The increased levels of digitization in both these spaces mean that after decades of working alongside each other in a complementary fashion, they finally have the means to work with each other proactively. For starters, Fintech firms have always had to play according to the whim and fancies of regulators as the latter seeks to play catchup with increasing levels of sophistication in financial technology. If RegTech firms and Fintech firms were to work together, it is possible for firms operating in these spaces to define the standards themselves, instead of having to rely on external agencies that may not possess the accumulated knowledge and expertise of industry participants.
The increased synergy between RegTech and Fintech would also result in the emergence of entities that operate at the intersection of both these companies. Such firms would not only have built a solid understanding of both spaces but can also spearhead further research and innovation in technologies that would contribute to better regulatory reporting and service delivery.
We are on the cusp of the next wave of transformation in both industries and the near future will likely bear witness to the emergence of firms that improve the tech-driven processes in both regulatory reporting and financial service delivery. It is very likely that the industries are likely to reach an inflexion point with the current style of work, after which interest could potentially shift to a future where activities are consolidated across both spaces.
Increased synergy is a great method to preempt the direction that the industry is likely to go in. Moreover, it could serve as an excellent opportunity for companies that are actively seeking to build a moat in the cut-throat world of BFSI.
The proliferation of technology has spawned digital equivalents to the analogue businesses that dominated much of commerce. RegTech, FinTech and all of its contemporaries are mirrors of their brick-and-mortar counterparts. To realize the vision of businesses that are truly representative of the technology paradigm, both RegTech firms and Fintech firms will have to work hand-in-hand to forge a new path towards establishing newer, more exciting companies that are built with technology in their DNA.
Source: Business World