[Column] Dominique Collett: Regtech - the new fintech, driven by complex financial regulations
“There are three elements driving interest in regulatory technology (regtech) in South Africa and abroad,” explains Dominique Collett, senior investment executive at Rand Merchant Investment Holdings and head of AlphaCode, a club for fintech entrepreneurs. “These include customer demand for an enhanced experience, cost reduction and the simplification of compliance due to burdensome regulation in the financial services industry.” Regtech is innovative technology developed to address regulatory challenges.
Whilst regtech focuses on compliance, risk management, regulatory reporting and transactions monitoring, the focus in South Africa has been on identity management. Most financial services businesses including banks, wealth and asset managers and even businesses in the property industry struggle with Know Your Client (KYC), a requirement of the FIC Act, when on-boarding new clients. It causes friction for customers to go into branches and produce their identity documents and each industry has its own set of regulations and requirements.
Companies like DocFox, ThisIsMe and StriderTech help to remove these barriers to enhance the customer experience.
Clients of these regtech providers experience significant cost reduction as branch infrastructure and paper costs are no longer needed. In addition, financial services providers are slapped with huge fines for not doing KYC properly on account of human error. It therefore makes sense to automate these processes as far as possible. These solutions ensure complete compliance due to complicated processes resulting from the change from a rules- to risk-based approach to FICA and KYC. For instance, institutions must now check for politically exposed persons, perform sanctions screening and check whether the client has had adverse media coverage. “Regtech automates the compliance process and makes it more accurate through machine learning,” says Brennan Wright, head of marketing at ThisIsMe.
Dylan Edel of DocFox explains, “Institutions need a technology solution to comply as well as offer a better customer experience.”
Entersekt, an innovator in push-based authentication and app security also operates in the regulatory space by helping banks to be compliant with regulations while ensuring customer information is protected. In Europe, regulations under the revised Payments Services Directive (PSD2) require banks to provide third-party providers access to their payment services and to account holders’ information if the account holder gives their consent. It also stipulates that banks will have to implement strong customer authentication measures to protect customers and secure transactions. With digital security being prioritised across the globe, it is becoming increasingly important for future-minded financial institutions to look at the requirements of international regulations. Regional regulations often not only impact institutions operating within a specific area but also those doing business with them, which means that PSD2, for example, could also impact South African institutions.
Entersekt provides customer and transaction authentication solutions that enable banks to exceed even the most stringent international regulations while making it easy for them to provide innovative services to their customers.
Often, banks struggle to take advantage of regulatory changes because they are usually risk averse and suffer from inertia. Certain fintech businesses go for this gap. For instance, Mama Money, Africa's first cashless money transfer operator was quick to act and announced that clients could FICA with a selfie. Traditional banks would struggle to implement this. Mama Money operates in nine countries throughout Africa.
Fintech players can grow their businesses through regulatory innovation. When TYME digital bank launched initially in South Africa, it managed to get one million bank accounts in nine months using guidance note 6 which allowed FICA to be done on the back of an ID number. The SA Reserve Bank was comfortable with this approach at the time, and the brand grew rapidly through viral account opening.
Eitan Stern, Legalese, director comments, “Technology and law develop together, but not necessarily at the same pace. Innovative entrepreneurs in the fintech space are incentivised to make the customer experience seamless. The problem is that not all entrepreneurs prioritise consumers and the industry as a whole, over their own platform. This is where regulations are important as they keep the industry safe as a whole. But writing regulations is slower than writing code, so fintech companies need to keep developing tech, advocating for updated legislation but still keeping within the bounds of the law.”
Collett concludes, “Soon Discovery and TYME CBA, two big digital banks, will enter the market and it will be interesting to see how the traditional banks respond to their frictionless KYC and regtech approaches.”