The deployment of new applications and the migration of core systems onto the cloud is in full swing, and financial institutions could arguably soon be free of the legacy constraints that prevent them from moving forward into this age of digitalization.
Before this strikes, FIs need to identify the operational risks involved in migration for the regulator, who will finally determine whether the FI fully understands how to manage these stumbling blocks. Hence, RegTech, to reduce the inefficiencies in regulatory reporting, with a focus on easing the burden of compliance in automation.
FIs gather regulatory data from a range of systems into data lakes, then spend substantial funding and manual effort in collating and reviewing the data. Leveraging cloud and linked utilities will give FIs an opportunity to manage compliance while driving down costs.
Redesigning Architecture
RegTech promises an evolution, For this to happen, architecture needs to be redesigned to meet the expectations of both digital customers and regulators, while also encouraging innovation and stimulating competition. In spite of open banking helping FIs to share data and services, data should also be open for regulators to be recognized as active participants.
The inclusion of payments and messaging in the data will enable regulators to call for information through APIs rather than formal channels to senior management.
AI Integration
AI is still in the early stages with several FIs and mostly used to extract data from documents. Once the data is in a structured form, information is processed faster, like credit card processing, loans or mortgage documents.
AI and ML combined definitely drive operational improvements, with real-time insights it has the potential to change the way compliance is currently handled, i.e. collate, combine, and analyze. If a platform is able to interpret a new regulation or monitor a change in existing regulation, it will allow FIs to implement the changes and review the risks in a timely manner. Here the point is not of headcount reduction, but to be in line with the regulation, which is time-critical.
Cost Reduction
Banks spend 80% of their budget on maintaining legacy systems, so, a cost-cutting approach to deal with the growing price tag for maintaining legacy systems appears attractive. Newcomers like Starling and Oaknorth are at an advantage having originated in the cloud and this dynamic is driving older banks to up their game and embrace the cloud.
A potential solution is to look for an external RegTech solution, but many FIs face the giant of working with a FinTech. This is where APIs can deliver, linking legacy systems with cloud-based solutions. It saves the burden of development and maintenance and also provides the flexibility to cope with changing regulations.
Further to this, it could be said that RegTech is encouraging a cloud revolution with a clear focus on restructuring regulatory architecture to elevate the role of the regulator, reducing complexity and improving oversight for FIs.
