HONG KONG (Reuters) - Financial services firms are increasingly turning to digital technology to meet onerous regulatory demands aimed at fighting financial fraud, creating a niche tech market that is estimated to grow to around $120 billion by 2020.
Regulatory technology, or RegTech, offers banks automated solutions that can speed up the cumbersome process of vetting clients and transactions, which is necessary to prevent money laundering and other financial crimes.
Regulators are also looking for more standardized digital transaction reports from banks to spot potential fraud more reliably and with fewer staff.
“The demand for this is enormous, everybody needs it,” said Peter Hetz, a director at Veridate Financial, whose software helps family offices and fund managers verify the identity and background of new clients and create reports for regulators.
Speaking at the Thomson Reuters Pan Asia Regulatory Summit this week, officials at the Hong Kong Monetary Authority and markets watchdog Securities and Futures Commission (SFC) said they saw major opportunities for technology to help financial firms meet growing regulatory requirements.
“Crooks will always exist, but you can reduce the risk. If you haven’t been doing your job in risk and compliance with technology, I’d be incredibly surprised,” Benedicte Nolens, head of risk and strategy at Hong Kong’s SFC, told the summit.
“It’s not only superior in a number of factors, it’s probably a lot (cheaper) and it’s certainly a lot faster” than banks’ back offices, she added.
Consultancy Quinlan & Associates estimated in a report this week that one such technology, blockchain, could cut the costs that banks incur to comply with anti-money laundering rules by $4.6 billion a year – or 32 percent of current annual costs – through reduced headcount, technology spend and regulatory fines.
Start-ups like Hong Kong-based Veridate and FixNix, which automates audit and risk tasks for small firms in India, are betting that as financial firms look to avert regulatory fines and focus on their core businesses, more of their compliance budget will go to technology.
Veridate said its automated audit process can reduce the time to sign up a new client at banks and asset managers to several minutes from weeks currently. By digitizing different tasks, watchdogs can also request regular checks to make sure banks’ clients remain compliant and monitor potential risk and fraud more closely.
The SFC is launching a pilot project with 20 banks to monitor and detect systemic risk using RegTech.
In India, FixNix signed an agreement to offer its software to hundreds of community banks through the Reserve Bank of India’s technology arm.
“Having partnerships with regulators opens many doors,” said Shanmugavel Sankaran, founder and CEO of FixNix.
Reporting by Elzio Barreto; Additional reporting by Michelle Price and Saeed Azhar; Editing by Lisa Jucca