With heightened regulations and increasing compliance costs to navigate, financial institutions are increasingly looking to technology for a helping hand.
Digitalizing regulatory processes can not only help to reduce costs, but also increase efficiency, monitor new regulations and transform data for other operational purposes. Dino Sani, Head of Treasury Services Latin America, discusses how, as a result, regulatory technology is taking off – and the benefits for banks in Latin America could be significant.
In efforts to avoid a repeat of the 2008 financial crisis, regulatory bodies have placed demands on banks to provide copious volumes of risk data for compliance. What’s more, banks have been obliged to submit this data with increasing frequency and granularity. Adding to this are heightened Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations, which require enhanced transaction monitoring and identification checks on clients.
Undoubtedly, complying with these demands is proving both costly and challenging for banks, with annual compliance costs substantial. Indeed, at least 10% of the operating costs of most banks can be attributed to compliance1.
The effects of these heightened regulations and associated costs also have wider ramifications. De-risking – where banks are withdrawing from certain sectors and geographies (particularly SMEs in emerging markets) to mitigate KYC costs – has become increasingly common practice. As such, smaller companies in regions such as Latin America and the Caribbean face a significant challenge in accessing finance to support their businesses.
In addition to contributing towards de-risking, increasing onboarding costs mean that financial inclusion is becoming an even more distant possibility for the region’s unbanked population.
Ways in which such regulatory-associated issues could be alleviated are thereby receiving close attention – from the financial services industry, and also from various Latin American governments. Subsequently, regulatory technology – or “regtech” – is beginning to gain real traction in the market, with a growing number of companies developing digital solutions with the aim of helping financial institutions (FIs) comply with regulations more cost-effectively and efficiently.
Regtech and the region
The potential applications of regtech for FIs around the world are manifold. Regtech could, for instance, be used to manage compliance data (including due diligence), create risk scenarios for stress testing and automate audit trails and regulatory reporting.
Harnessing technology for compliance could have particularly profound benefits for Latin America. The region has been in the regulatory spotlight in recent months, with institutionalized money laundering highlighted as a concern. Regtech, however, is well-placed to enhance regional efforts to uproot the problem. Artificial intelligence (AI), for instance, can be used to intelligently mine for specific information and patterns within cluttered big data sets, identify discrepancies, and alert banks to unusual or suspicious activity.
A further way in which regtech could be used to address issues for banks operating in the region is its potential for automating and centralizing KYC processes through blockchain technology. Cryptographically secure, blockchain is more resistant to retrospective modification and its open ledger format registers activity in a wholly transparent way. As such, storing information on these collaborative databases could support the integrity of data, authorize identity, and reduce the cost and risk of onboarding new clients.
Of course, blockchain is still in the early stages of development, so it is not clear exactly how such technology could be applied. But efforts to enhance due diligence processes are underway elsewhere. Also aiming to create a more efficient way to authorise identity is the Global Legal Entity Identifier (LEI). Launched in 2014, this centralized online global database of registered companies stores information and contact details needed for both KYC and KYCC checks – thus reducing the costs of banks carrying out these checks themselves. With this enhanced system, there is scope for the remote opening and access of bank accounts through mobile technology – meaning that banks in Latin America could serve even those who cannot physically access a bank branch, whilst still upholding their compliance obligations2.
State of the regtech market
As such, it is unsurprising that regtech is increasingly being explored across the globe – and Latin America is no exception. While the current state of the regional regtech market is characterized by its nascence, there are clear efforts within the region to create effective networks to foster regtech growth.
Indeed, the promise that regtech holds for the region is being recognized at the very highest level. In 2016, the Mexican government announced its Financial Inclusion policy, citing its support for technologies that support the efforts to extend financial services to all, without compromising financial regulations.
And in April 2017, the Regtech for Regulators Accelerator (R2A) announced the Comisión Nacional Bancaria y de Valores (CNBV) in Mexico as one of its three partners. As such, the CNBV will be working alongside the R2A and software developers to model potential regtech solutions until July 20183.
Another key initiative launched in 2017 was the International Regtech Association (IRTA). IRTA aims to become a representative body for regtech companies around the world, including those in Latin America. Comprising of FIs, IT companies, legal advisers, consultants, academics and regulators, the association hopes to create international standards to give credibility and structure to the regtech sector.
More importantly, this approach of open dialogue and collaboration across the finance industry can help to promote a regtech-friendly environment and unravel the vast potential of the digital solutions on offer to banks. Involving parties across the broader financial services industry – including the fostering of partnerships between banks and regtech companies – is the clearest way to ensure that regtech can be leveraged with maximum efficiency, mitigate risk, and support banks in serving the needs of both existing and new clients.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.
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