"Isn't there an algorithm that can do that?" Defending the need for additional compliance staff is a skill at which most credit union compliance managers have become particularly adept. "No, we can't completely outsource it. No, we can't completely automate it." A new breed of fintech, dubbed "regtech," aims to make those defenses less true.
Regtech is being heralded as the next big opportunity for financial institutions to leverage technology, this time against compliance burdens. The Institute of International Finance defines regtech as "the use of new technologies to solve regulatory and compliance requirements more effectively and efficiently" with the goal of making compliance less complex, thus freeing up capital to put to more productive uses. Regtech distinguishes itself from current solutions because of its marriage of new technology, advanced analytics and real time capabilities, plus cutting edge algorithms and models.
Among the potential opportunities for regtech solutions, those geared toward identity verification, AML, fraud and enterprise risk management have strong use cases for credit unions.
Advances in machine learning and artificial intelligence have made it possible for a computer to identify and interpret new regulations, communicate appropriate compliance actions with affected business units and then update compliance manuals. This intersection where super computers meet credit unions has the potential to address portions of the compliance process that are very manual and resource consuming. Still, there are other issues to be addressed. Uncertainty and ambiguity around written rules and inconsistent interpretation of rules by examiners were two key themes that emerged from CUNA's Regulatory Burden Financial Impact Survey. Clarity in construction of rules and regulations, and consistency among examiners will be an imperative for this to reduce cost.
With an annual regulatory cost impact of $6.1 billion across the credit union industry, we need innovative solutions now. The Regulatory Burden Survey underscored the outsized costs of compliance to small credit unions in particular. Representing about 74% of the industry, small credit unions bear regulatory costs, relative to assets, that are more than three times of what large credit unions incur.
Regtech firms have been slower to take off in the United States than in other markets. The hurdles that regtech must clear to be viable in the credit union space are several. The extreme complexity of regulatory compliance is a barrier of entry for some technology entrepreneurs and investors. Many credit unions, especially those in the small credit union category for whom regulatory burden is a survival issue, will not be able to afford investments in this technology.
Regtech solutions will need to be mature, cost-effective and widely available by third-party vendors before we can see an industry-wide benefit. In short, it's going to take time.
Meaningful collaboration with technology firms, financial institutions and regulators to establish standards and ensure acceptance will be important in helping foster needed innovation and investment. This is an issue that many credit unions are encountering now with current financial modeling systems.
Regtech is fledgling in the fintech space and we are likely to see many more entrants and innovations in the coming years. Credit unions and community banks, at which relative costs of compliance are highest, are the most vulnerable to increasing regulation and have the most need for partners. Larger banks and financial institutions with the ability to invest in the right regtech solutions now will enjoy yet another competitive advantage. While we should not abandon our efforts for real, meaningful regulatory relief, we should collectively look at this new opportunity to make regtech accessible to credit unions sooner rather than later.
Nicole Bowen is vice president of compliance, IT & Facilities at Fairfax County FCU. She can be reached at 703-218-9900 Ext. 1187 or [email protected].
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