Analysis: regtech in the US – the state we are in
The US represents the largest financial markets in the world. At the end of 2015, the size of the country’s banking sector alone was $15.9 trillion, generating a net income of $161.6 billion (according to SelectUSA).
The financial sector in addition, employs more than six million people in the US, with several more millions employed in the ancillary industries, such as education and research, technology, regulation and security, transportation and logistics, tourism. It is, therefore, of paramount importance that the future of the financial sector in the US is ensured and protected.
The truth of the matter is that after the downturn in 2008, the US financial sector has been increasingly difficult if not impossible to manoeuvre in.
For instance, there have only been a handful of new federal banking licences issued by the Office of the Comptroller of the Currency (OCC) across all states between 2008 and 2017. That figure in the UK will be 14 and an unbelievable 21 and 38 in India and China, respectively.
The message is simple: the financial sector in the US, which has been the backbone of its economic and political leadership in the modern world, has been somehow stagnant since 2008. The new digital banking era is surprisingly still embryonic in the US whereas countries like China, the UK, India and Singapore are setting the tone, with Australia, Canada and Germany fast developing a mature digital banking state.
Why is this the case – is there an apathy towards innovation in the US? The answer is an emphatic “no”. Because during the same timeframe of 2008 to 2017, the market capitalisation of the innovative technology and wearables sector in the US has grown from $470 billion to $2.9 trillion with Apple, for instance, valued at $800 billion in April 2017.
The technology sector now employs more people than the financial sector in the US. This has never happened before.
We, therefore, need to review why such innovation trends have not been present in the US financial sector? The answer is quite clear, it is because of the “increasing operational complexity” and “abundance of new regulatory rules”, which as we know have also been a trend in other developed nations. Because of these principal issues, it is now more difficult to make “good, clean money” in the financial sector.
These two issues, however, are fuelled by one crucial factor – “absence of trust” – which has become an impediment to promote new ideas and innovation in the US financial sector.
The emerging world, on the other hand, although affected by the 2008 downturn, has been able to engage with the new ideas and possibilities that are already showing tremendous financial growth and future potential.
From that angle, and perhaps in very few instances of the modern history, innovation in the US is lagging behind.
We in the US need to get our acts together – and it’s not too late. Yet!
The sheer fact that “trust is an issue” ideally should lead to more innovation, openness and so forth. Actually, it has led us to quite the opposite. The rules-driven regulations are becoming even larger and complex, with often conflicting principles.
Unfortunately, there is no way out until we the people decide, together, that we need to change. It seems that the time is now, because of the obvious cost pressure on the banks, also the pressure of expectation on the US regulators to deploy advanced technology for better analytics, smart contracts, real-time regulations among the others.
I have recently joined, along with a number of other PhDs and scholars, regulators, banking CEOs, lobbyists and technology innovators, at the Harvard University’s Kennedy School of Business and Government to discuss the future of regtech and the opportunities it is creating particularly from the US standpoint. It was fascinating to see the depth of expertise and knowledge available both across the regulatory and the technology camps, the keen interests of the banks but also the absence of the much-needed, open, collaborative ecosystem for promoting sustainable regtech innovation.
I recorded a few comments during the sessions, which are below. These simple messages are enough to describe the situation:
“Regulatory compliance is a sole crushing job.”
“Zero confidence that we as regulators can influence the US banks.”
“Only two of the 33 US-based regtech companies have ever met a US financial regulator.”
“We will innovate, come what may. There’s a market outside the US!”
From these messages, it is obvious that there is a deadlock; a deadlock to come forward and trust the others, deadlock to get together and build an open, opt-in, trusted work environment where innovation can kick-in and spawn, in a sustainable way.
We need to protect and re-modernise the US financial sector including bringing in innovation across it.
The future financial services will be much different than it is today.
By 2030 and beyond, we can expect a subscription-based, demand-led financial economy where consumers will be looking for the cheapest, fastest and most secure transaction medium using online web.
The traditional concept of having a bank account through which one will pass through all of her/his transactions will give its way to online and mostly cloud-based, real-time platforms that are also able to perform financial transactions and provide services, relentlessly.
It is almost frightening to consider the prospects of some of the banking service providers of today, if they are unable to change themselves in time. Indeed, in some parts of the world including China, India and parts of Europe including the UK, some of these transactions are possible today and happening too. The state of maturity of cybersecurity, data privacy and related sectors, nonetheless to say, will need to evolve too to make space for this open banking culture.
Regtech is the innovation-in trust
Given the size and proximity of the issues, the definition of regtech has been evolving, and it will continue to do so.
In simple terms, regtech signifies de-complexing and de-risking our current risk and regulatory environment, to bring in or adapt to a new, alternative and more open ways of demonstrating residual regulatory compliance, more so by risk themes than by regulations, thereby helping to reducing cost and complexities, improving effectiveness of the financial services, and most crucially, achieving trust of its consumers.
Future evolution of regtech therefore, should focus on “trust” and prioritise innovation areas to maximise trust and consumer benefits. This is as true from a global standpoint as to the US financial sector.
Such benefits could be obtained by more secure, real-time and faster services or responses, quicker outcomes and decisions, improved quality of advice, e.g. improved quality of sales and suitability, transparent single view accessible by the customer, easier checks, e.g. use of a combination of biometrics, digital identity and other techniques to speed up the onboarding and further transactions processing.
Bring together innovative solutions, use technology as the enabler
When our forefathers created the banking systems, they didn’t have any technology but it worked, part of the reason it still exists today. So the innovative ideas and the regtech solutions matter more than the underlying technologies.
Innovation in regtech needs to focus on the issues faced by the financial sector, alongside bringing in new technologies that can either help to resolve it or change the fundamental processes or ways of working.
Using advanced analytical and identification technologies to speed up the know your customer (KYC) processes and set up utilities will be an example of the former, whilst using a combination of artificial intelligence (AI) and blockchain/distributed ledger techniques to revamp the regulatory compliance monitoring and reporting processes, either used by the regulators or by a consortium of banks or by the legal entities of a single bank globally, will be the example of the latter.
Collaborative ecosystem and skills needed for regtech to shine in the US
We will need collaborative ways of working for regtech to expand in the US and to provide the desired benefits to the financial sector, initially.
Collaboration refers to open ways of working, most often industry-led working groups where users and experts from various fields come together to create something new or change something already being used.
Regtech collaboration, at the minimum will require the banks and the financial institutions, the regulators, the regtech technologists and the professional experts including the researchers and academics to get together.
Increasingly there are examples where this has already been successful, for instance, in the UK, the financial regulator – the Financial Conduct Authority (FCA) – has led the charge and helped to bring together these parties.
FCA produced working papers, conducted open consultations (similar to the APA – the Administrative Procedure Act in the US – but simpler and quicker), including three TechSprints and four industry roundtables on regtechs asking the banks, technologists and the general public as to what needs to be done. Initial results have been groundbreaking, with multiple live projects for instance, to roll out regtech standards and to automate regulations into machine-readable codes for in-built compliance.
These projects will need to go through their lifecycles to produce the desired benefits but it does prove the point that regtech can be a win-win for both the regulators and the regulated, if worked in a collaborative environment.
It is a fascinating time to join the regtech ecosystem and contribute to shaping the future of our financial services, including how our next generations are going to use it. At the IRTA, we are committed to help achieving these objectives and also proud of it.
What are the areas to focus on and how are we going to do this?
There are many places that we can start with, however, it is key that advancement of regtech in the US is carried out with a centralised focus including an open, innovative, collaborative ecosystem, which is joined with the international movement unwaveringly…
This is an excerpt. The full article is available in the July/August 2017 issue of the Banking Technology magazine. Click here to read the digital edition – it is free!