We’re now living in unprecedented times. Step by step, the circumstances surrounding the global health crisis are changing, transforming the way we work and live. Technology has taken centre stage in the success of many companies.

Financial institutions were not quick to warm up to the benefits of embedding technology into their compliance processes, but it is finally happening. Innovation is happening faster than ever before, in real-time.

KPMG reckons that, by the end of 2020, RegTech — compliance technology — will make up 34 per cent of all regulatory spending.

What’s more, it won’t peak there. Spending on compliance technology is predicted to grow by 48 per cent year on year for the next five years. It is clear, compliance departments are about to transform.

What opportunities can increased digitalisation unlock for them in the coming decade?

From reactive to proactive

In 2018, the average Tier 1 banks spent about 20 per cent of its operational budget on compliance and employed 500 compliance staff. But despite the investment and manpower, most banks still struggle with the workload.

When McKinsey benchmarked 24 leading banks — including several systemically important ones — across Europe, Asia, and North America, a majority said their foundational compliance capabilities and controls weren’t as mature as they’d like.

The upshot is that compliance staff often expend most of their efforts on low-level tasks and don’t have time to strategise.

By automating daily routine repetitive tasks, Regtech can significantly cut the low-level workload. The time required for KYC checks, for instance — these typically take one to three months, much to consumers’ frustration — can be cut by 90 per cent: a staggering 5.4 million hours a year in time savings.

Nicholas Melas, an expert in risk and compliance who recently joined our team at ClauseMatch as Senior Implementations Manager, explains: “Automation frees up people. Suddenly, you no longer have to go through spreadsheets line by line, tick boxes, or push paper around. Decisions happen much quicker.”

But compliance technology isn’t just about speed. What’s more important is that, with less time required for low-level tasks, compliance staff can focus on analysis, strategy, and the development of better systems and controls. In other words, they can deliver more value.

Melas puts it this way:

“You need to make the right decisions with the right speed and care. Banks tend to treat all decisions in the same way, which is inefficient and time-intensive. Technology allows you to be more selective. You can filter issues by the level of risk they present and prioritise those that need in-depth consideration and discussion.”

Slashing overhead

If the compliance workload is growing to unsustainable levels, so are costs. Case in point, the General Data Protection Regulation (GDPR) has to date cost businesses US$1.1 billion to implement.

Industry-specific regulations have even higher implementation costs:

  • The second Markets in Financial Instruments Directive (MiFID II) has cost over EUR2.5 billion (approximately US$2.78 billion)
  • Dodd-Frank — the US’s signature Wall Street reform law — has cost US$36 billion
  • Basel III rules — the set of international standards developed following the 2008 banking crisis — are expected to cost between EUR40 million to EUR120 million (about US$45 million to US$134 million) per bank

More to the point, costs don’t end once implementation is over. There are also ongoing monitoring requirements, admin, risk assessments, and regulatory updates to contend with.

Just as compliance technology can cut compliance departments’ workload, it can also slash these costs. A 2017 study found tech can cut anti-money laundering costs by 42 per cent, saving banks GBPUS2.7 billion (about $3.6 billion) a year. Similarly, when ClauseMatch developed a Proof of Value at Lloyds’ Lab, it found it could slash policy management costs by up to 30 per cent.

These savings free up funds for more investment and better returns for stakeholders. More importantly, they can be passed on to consumers in the form of better rates and more cost-effective products.

Framing the big picture

Technology isn’t just good at taking the sting out of repetitive, time-intensive tasks. AI and machine learning can parse huge amounts of data and connect the dots. In an increasingly complex and challenging environment — and with Brexit now all but certain — this can give banks an edge by providing them with an unprecedented level of visibility into the regulatory landscape.

This is exactly what fintech challengers have been doing. For example, Revolut, one of our clients, sees great potential for AI to scan the regulatory horizon for relevant changes to help assess risk.

Given the immense amount of laws and regulations this challenger bank has to contend with, this approach is of huge help when compliance teams are working across different jurisdictions. Especially now when everyone is working remotely. AI excels at seeing trends it would take people ages to spot.

However, AI isn’t a silver bullet, it’s a tool, not a solution to everything.

That said, in a world where most of your competitors are often too busy putting out fires to think ahead, AI-powered tools can give banks a significant competitive advantage.

Beyond 2020: how will tech transform compliance in a decade’s time?

By 2022, banks will have collectively invested US$76.3 billion in new technologies. For those that take the leap, the benefits will go beyond cost-savings and increased efficiency. More significantly, they’ll place themselves in a better position to unlock the opportunities the new decade will bring.

Technology can help reduce the manual burden, inform, and empower banks’ compliance departments. And the better banks are at compliance, the easier it’ll be to stand out.

Melas puts it this way:

“Technology can help compliance become an inherent part of everything a bank does, which is as it should be. When compliance is embedded into banks’ processes, they’ll be all the better positioned to deliver products that live up to regulators’ and customers’ expectations and work exactly as advertised.”