As we move further into the 21st Century, the economies of the world are becoming more technology-driven. This has streamlined so much of our daily lives in business and leisure but it also leaves us vulnerable to new methods of crime.
The banking sector has been revolutionised by digitisation. Nowadays almost all personal and commercial banking can be carried out online instantaneously. This new reality has created a demand for swift and secure customer verification and regulatory compliance monitoring.
The growth of online financial services is forcing lawmakers and law enforcement to change tact to keep up. A community of tech companies known as Regtech (regulatory technology) has grown and they seek to offer solutions to the challenges posed by the rise in digital products. RegTech companies operating in the banking sector primarily look at offering solutions to companies to stop their platforms from being used to launder money. To do this RegTech companies rely on big data and machine-learning to monitor huge numbers of transactions online, something that is just not possible with traditional compliance practices. RegTech companies also carry out KYC (know your customer) processes to verify who is actually carrying out the transaction.
This sector started to grow mainly after the 2008 financial crisis as banking became more stringently regulated. Also a number of technological breakthroughs such as the widespread use of smartphones and increased attainability of point of sale card readers to individuals. This fueled the rise in online financial transactions thus creating the demand for fast and scalable fraud detection.
One RegTech company currently active in the European market is Elucidate. This Berlin based company offers banks automated, data-driven approaches to expand their online services without taking on more risk of financial crimes being carried out on their platforms. Elucidate makes use of a bank’s own data as well as public and proprietary data to power their “EFI Platform” or their Elucidate FinCrime Index. This index is a hybrid system of machine learning and modelling made by humans to assess the probability of financial crime taking place.
For the financial sector, recent events such as the COVID pandemic and the geopolitical instability in Eastern Europe have led to more challenges. There has been a rise in financial crimes at a time when the financial services sector has been tasked with implementing strict sanctions on Russia. It is in this climate that Elucidate has been able to raise $8 million in a recent funding round. Shane Riedel, co-founder and CEO of Elucidate explained in a recent press release that, “The Ukraine-Russia conflict and the complexity banks have faced implementing the most recent sanctions has, once again, revealed the sheer scale of financial crime risk banks can find themselves exposed to when they lack the proper tools”.
In the circumstances that policymakers find themselves in now regarding sanctions as well as other forces in the financial world, RegTech could become an important tool. Regulators have an enormous opportunity to be more effective if they embrace the power that RegTech has. In a recent report form the European Banking Authority, it was identified that regulators can better thwart money laundering and terrorism finanicing schemes. The report also recommended the wider use of RegTech solutions in supervisory reporting.
RegTech companies such as Elucidate face challenges when it comes to increasing adoption. Many financial institutions are still using old technology. In 2018 it was revealed after much disruption that the IRS in America was still using systems built in the near extinct programming language Assembly from 60 years ago. Legacy systems are expensive to update and don’t work well with the latest technology. Companies also need to build a high level of trust. There is a large amount of potentially sensitive data being used, financial institutions and governments need to trust that data will be protected.
RegTech is quickly becoming a vital part of the online financial ecosystem. Without it many of the payment services we have today simply would not be possible. In future governments and regulators will have to embrace innovation to ensure that regulatory enforcement keeps up with the fast paced world of digital finance.
