RegTech as a driver for regulatory and compliance cost reduction

04 May 2017

The emergence of new technologies in the regulatory space is offering financial services institutions growing possibilities to reduce costs and improve the quality of its regulatory response process, says Elmo Olieslagers, Managing Partner of Compendor. 

The financial services industry continues to face a growing volume of regulatory change, as both international and domestic legislators craft rules to improve the functioning of the, in the eyes of many, still ailing industry. According to a recent survey from Thomson Reuters among 600 compliance practitioners in financial services, the end of regulatory pressure is by no means in sight – 70% of respondents expect regulators to publish even more regulatory information in the next year, with 28% expecting significantly more. Consequently, nearly two-thirds, 63%, of respondents foresee the workload from compliance-related activities to increase in the next year. 

In the wake of the growing regulatory and compliance burden, financial services firms are increasingly looking at ways to decrease the costs for implementation and monitoring. Compliance budgets have spiralled in recent years: 55% of institutions say their compliance budgets have increased by up to 25% or more in the previous 12 months, with 62% of respondents saying similar the year previous. 

In doing so, one of the methods rapidly gaining terrain is ‘RegTech’, which stands for Regulatory Technology – digital processes and tools that leverage technology and online support models integrated in day-to-day operations to enable a more automated, cost-effective way of meeting compliance and regulatory reporting needs. According to Olieslagers, founder of Compendor, a boutique consultancy with a focus on financial services RegTech, the adoption of innovative solutions combined with online support models can bring down costs substantially, in particular at organisations that enjoy higher levels of RegTech maturity. At the heart of the benefits stand two central themes: better analysis among core stakeholders, and improvement to business performance.

New technologies can help financial services to lower costs of regularoty operations

Improved interpretation

RegTech solutions can avoids costs, resources and time that previously was spent reinventing the wheel: interpretation of regulation. At the majority of financial services institutions, business lines and/or legal entities are granted the mandate to interpret the same regulation autonomously. This stems in the most cases from the organisation structures in the industry, in which country organisations enjoy a significant share of sovereignty on business critical processes such as compliance. 

Yet in the case of global or European regulation, local interpretation often leads to inefficiencies. “This not only creates de-harmonisation and eliminates efficient best-practice sharing (learning) but also introduces (often small) differences in processes leading to additional workload in reconciliation down”, he states.

The introduction of RegTech could in his view improve regulation interpretation along three facets. “By ensuring employees have access to up-to-date legal content and interpretation thereof, as well as industry best practices, they can better perform their role”, remarks Olieslagers. The use of automated routing, for instance through decision tree driven solutions, further can add to interpretation effectiveness: “Commonly the same interpretation questions are asked multiple times across business lines and legal entities, digitisation can provide insight and knowledge sharing.”

Another aspect that can improve regulation assessment is the use of online self-assessments. “Bolstering knowledge, leveraging a tool with completely up-to-date legislation, helps employees focus on only those legal requirements that are relevant to their organisation, avoiding time and money spent on topics that should not concern them in the first place.” The combination of these elements leads to improved efficiency across the process, down the line enabling improved cost control. 

Business improvement

Control over regulatory and compliance requirements can in its slipstream bring along added benefits to the business too, highlights Olieslagers. “Typically, financial institutions manage regulatory compliance and risks along the ‘3 lines of defence’ model. This means that at least Business, Legal, Compliance, Risk, IT & Operations and Audit are involved in Signalling, Implementation and Monitoring activities. In other words, the regulatory response process involves a large number of resources from ‘Run’ and ‘Change’ activities of organisations, often distracting key business resources from their core tasks – servicing the end-client. RegTech is heralded for lowering their time spent.” 

RegTech can avoid costs, resources and time

On top of pure efficiency, RegTech can add to quality, mainly through its ability to shed brighter light on insights and dependencies. “Top of the bill RegTech solutions are capable of interlinking related regulatory topics / regulations, enabling stakeholders to gain visibility in the impact of various interdependent regulations (e.g. MiFID II / MiFIR / MAD II / MAR and PRIIPS) on players across the entire chain of command, including Products, Services and Legal.” 

The management of traceability serves as a good example, says Olieslagers. “Concerns about the interlinkage between legislation, gaps and compliance action, or version control concerns that may arise if updates to legislation and regulations become available during regulatory projects, are a common pitfall in the compliance space. Better technology improves traceability and transparency, which both benefit completeness of compliance monitoring.”

Implementing RegTech?

To fully capture the benefits RegTech can bring, a pragmatic shift of business consciousness is required, says Olieslagers. He points out that management should ensure that four facets are in place:

  • Accepting regulation as hygiene factor, not a strategic differentiator;
  • Ensuring Legal and Compliance departments accept technology as an opportunity;
  • Embedding industry best practice solutions instead of in-house developments which are often cost and time intensive and do not incorporate industry-wide knowledge;
  • Adopting a unified, value-chain based approach, instead of fragmented autonomy of business lines and entities.

The business and operating models of digital-only banks

04 April 2019

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.