The Role of Regulatory Technology (RegTech)
Taylor Grenawalt
Director, Research & Insights
February 23, 2023
9 Minutes
Technology companies have found themselves increasingly within the crosshairs of legislators, regulators, and bureaucrats, particularly in recent years, as social and political concerns have yielded growing calls to rein in some of the unbridled and occasionally opaque operating systems utilized by tech behemoths. As entities across the globe continue to experiment with and implement differing regulatory regimes and frameworks, companies will be tasked with effectively navigating an ever-evolving and expanding regulatory landscape.
Regardless of organization size or region(s) of operation, such an undertaking will be a daunting challenge for any technology company. However, regulatory technologies (RegTech) have been growing in prominence precisely for that reason; these solutions have the potential to equip entities with the toolkit necessary to efficiently and nimbly conquer what can be a fickle global regulatory environment. Such technologies are likely to grow in importance as businesses seek to balance mounting data and compliance requirements with the concurrent need to operate in an innovative and agile manner that is conducive to growth.
What is regulatory technology?
Regulatory technologies refer to the technological tools, systems, and processes that enterprises employ to more efficiently and effectively manage compliance with regulations, governing entities, and other regulatory and monitoring frameworks.
These technologies can incorporate a slew of capabilities and functionality, including automation and continuous monitoring, that are designed to ensure that operations and outputs are and remain compliant with the pertinent sets of regulations. Beyond simple monitoring and reporting of activities and operations, RegTech solutions can also enable the ability to forecast and predict future risks, manage liabilities, and proactively adjust to shifting frameworks.
Although solutions have historically been geared more toward highly regulated industries – such as healthcare and financial services – they can be highly customizable and flexible, ultimately depending on the sectors and regions a company operates in. In the face of growing regulatory scrutiny and pressures, technology companies are poised to join their more heavily regulated brethren in embracing emerging RegTech solutions and applications as a means for proactive regulatory responsiveness and data compliance.
The rise and importance of regulatory technology
The rise in RegTech adoption, utilization, and prominence among enterprises can be attributed to various trends, factors, and developments that have taken hold over the recent past. According to a report published by Research and Markets, it’s estimated that the global RegTech market will have generated a CAGR of 16.5% from 2022 to 2029, reaching $23.6 billion by 2029.
Financial institutions and embedded finance
Embedded finance represents the integration aspects of the financial services industry into non-financial products, services, and technologies – i.e., an ecommerce platform allowing one-click payments or a brand's credit card. The integration of embedded finance allows enterprises to conveniently offer their customers payments and financial services without needing to leave the platform. As a result of providing such services and capabilities, companies are tasked with ensuring that personal and sensitive data is securely and privately protected against malicious actors or non-authorized entities.
Digitalization
The effects of growing digitalized engagement and operations are part of the catalyst for increased compliance costs and spending. With customer engagements and transactions increasingly taking place in a digital environment, there is an expanded opportunity for malicious online actors to engage in fraudulent activities. From this, and alongside embedded finance, companies can encounter a substantial rise in the spending and resources needed to ensure compliant data privacy protections.
Cloud and automation technologies
The rise of cloud and automation technology has increased the speed of digital activities and the importance of efficiency in conducting the operational tasks needed to maintain compliance. This has contributed to a growing need and demand for the ability to facilitate and conduct fast transactions and engagements and the ability to leverage automation to ensure such activities adhere to the relevant compliance frameworks. Taken in that context, RegTech is an efficient solution for enabling fast and compliant activities and transactions with customers.
Managing regulatory compliance and frameworks
Across the globe, governments and governing entities have been developing and enacting various regulatory frameworks designed to strengthen data privacy protections, transparency, and accountability across the technology sector. Having been previously left largely and relatively unregulated, technology enterprises are being forced to grapple with a whole new set of competing concerns, considerations, and risks.
Regulatory frameworks - Europe
Europe’s General Data Protection Regulation (GDPR) took effect in 2018 and serves as the regulatory framework for data protection and privacy throughout the European Union. The framework aims to protect individuals' personal and private data by requiring companies that collect data from individuals within the EU to maintain effective processes and policies for handling, managing, and storing personal data. Companies that have been found to violate the regulations or fall out of compliance are liable to face harsh financial penalties and fines, which can add up fast.
Amazon currently holds the crown for the single largest GDPR penalty, which came in at a whopping €746 million in 2021. The penalty arose from a 2018 complaint that alleged that the company collected and used personal data to deploy targeted advertisements without consumer consent.
Although Amazon holds the single largest GDPR fine, Meta has been one of the most targeted companies found to violate GDPR. The company racked up approximately €747 million in publicly disclosed European data protection fines through 2022. Keeping the trend going, Meta has kicked off the 2023 new year with a brand spanking new pair of penalties: the Irish Data Protection Commission has announced a €210 and €180 million penalty for Facebook and Instagram, respectively.
Regulatory frameworks – United States
In contrast to Europe, the United States lacks a national or standardized approach to data and privacy protections. However, complicating matters for technology companies, states have started enacting their own regulations, yielding an incongruous framework of a regulatory mishmash. For example, privacy and data protection legislation in California and Virginia took effect at the start of 2023, with differing protections set to take effect in Colorado, Connecticut, and Utah by the end of the year.
Without a consistent and standardized regulatory framework, technology companies with operations and activities in the U.S. will need to account for existing regulations, currently proposed legislation, and potentially new state legislation. The staggered and differing state-by-state structures are likely to compound the challenges, costs, and resources needed to ensure that a company is compliant and operating within the applicable data and privacy frameworks.
Putting it all together
As a result of these factors, it’s of little surprise that technology companies, alongside other industries leveraging technology solutions, are turning to RegTech tools to improve operations and ensure compliance and regulatory risk is effectively managed. The continued evolution of the technology mentioned above and the ever-expanding and structurally differentiated regulatory landscape are likely to support RegTech innovation, adoption, and spending moving forward.
What are trends within regulatory technology?
With its continued traction across industries and businesses, the following technological trends have served to bolster the capabilities, functionality, and applicability of RegTech solutions:
Artificial Intelligence and Machine Learning:
- AI/ML integrations can enhance compliance risk identification and management through automation and improved operational efficiency
AI and ML capabilities can not only be employed for various compliance and regulatory functions, but they can also carry significant advantages that can enhance a company’s operational effectiveness and efficiency. Beyond ensuring that compliance requirements are met across an enterprise, RegTech that incorporates AI/ML functionality can reduce the compliance costs and needed resources associated with the compliance processes, improve accuracy and analytic capabilities, provide for validation and testing, and use predictive models to identify patterns indicating potential violations or discrepancies, as well as predict future risk.
Supply Chain Management:
- Supply Chain RegTech solutions contribute to an improved supply chain system characterized by high visibility and proactive risk management
As supply chains become globalized and grow to encompass hundreds of various companies, enterprises can find themselves overwhelmed with ensuring supply chain integrity, risk management, and compliance. However, RegTech can serve as a solution to ensuring effective supply chain monitoring, management, and reporting, while simultaneously limiting downstream and upstream risk. With such solutions, enterprises can streamline and automate their data collection and reporting to maintain high visibility and proactive control over supply chain compliance and risk.
Blockchain:
- Blockchain technology strengthens the security, transparency, and verification of client onboarding, recordkeeping, and monitoring activities
Blockchain technology represents a promising technological trend within the RegTech vertical. Using immutable distributed ledger technologies, enterprises can securely and transparently monitor and record activities for compliance and reporting purposes. As technology companies and/or non-financial companies undertake an increasing number of transactional and data collection activities, partly stemming from the tailwinds of digitalization and embedded finance, they’re likely to encounter a growing list of regulatory considerations, such as Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. The immutable onboarding, recordkeeping, and monitoring advantages offered by blockchain technology provide enterprises with an innovative and efficient means to handle such concerns as they arise and evolve.
What is next for regulatory technology?
RegTech represents a rapidly growing field that has expanded beyond traditionally heavily regulated industries – such as financial services – to encompass a broader and more diverse set of industries, including technology. This expansion has been fueled by business globalization, the digitalization of customer engagements, and the rise of structurally different regulatory pressures around the globe. Consequently, businesses are finding themselves encumbered with a new and growing set of regulatory, compliance, data, and privacy requirements. As such, RegTech solutions offer a substantial value-proposition to enterprises, particularly taken in the context of emerging technological trends supporting RegTech innovation and adoption, in that they enable and contribute to the effective and efficient satisfaction of regulatory requirements while simultaneously reducing and managing the risk associated with non-compliance.
