Burdens and Pain Points: Regtech to the Rescue!

The cost of doing business as a credit union keeps rising. In the past few years, regulatory expenses have steadily increased. Smaller credit unions averaged 1.12% of their total assets, while large credit unions averaged 0.33% (Hui, Myers and Seymour, 2016). One of the hopes of regtech is that it will improve the efficiency of managing regulations and reduce this high cost of maintaining regulations. One thing we can all agree on is that maintaining compliance is a sometimes inefficient process.

Regtech Is Still New

When Filene conducted research of regulatory technology use among credit unions, the term was virtually unknown to many credit unions. Regtech is the term used to describe the new wave of financial technology designed to address regulatory requirements. Regtech makes use of data from an individual credit union, databases of regulations and compliance-based algorithms. Most credit unions use some sort of regtech already, such as enterprise risk management software or fraud protections and alerts. But when viewing regtech as an offshoot of fintech, there are a number of cutting-edge, digitally-based technologies engineered to help credit unions monitor, report and comply with regulations.

Ultimately, regtech promises to allow credit unions to provide better service to members and to streamline inefficient processes that confront credit unions. It sounds simple enough: Automation will drive down costs of regulation compliance and free up time for credit unions to focus on what really matters: Their members.

If Only It Were so Simple

Filene's report "Credit Union Regtech: Innovation and Expertise" by Chandra Middleton looked at nine different credit unions of varying sizes, to explore how credit unions were currently managing regulation compliance. This research revealed several insights on how credit unions are coping with the current regulatory requirements.

Surprisingly, we found that all credit unions, regardless of size, need support in managing regulation requirements; the struggle is not confined to only certain kinds of credit unions. In fact, the amount of money a credit union can afford to spend on regtech has no correlation with efficiency of their regulatory responsibilities.

It's About Mindset

What does matter is how your credit union views and approaches regulations. Does your credit union view regulations as the enemy? A burden? A barrier that is holding your organization back? These viewpoints, when held by credit union compliance professionals, were shown to hinder innovation and creativity when managing regulatory requirements. Whereas credit unions who tended to view regulations existing for the safety and good of their members tended to manage their regulatory tasks better. When understanding the spirit of the regulation, it's easier to find workarounds, and this is exactly what some of the more efficient credit unions are doing.

Among the credit unions that incorporate new regtech with their systems, the study found that often, credit unions invest in new regtech to find that it fails to integrate well with their legacy systems. This issue goes beyond regtech and applies to other types of fintech for credit unions as well, but it remains a common problem.

And It Doesn't Stop There

Filene also found that when some credit unions succeed at integrating regtech, when it comes time for reporting, they are met with outdated portals at governmental agencies and often resort to manual reporting. Until regulating bodies accept and integrate with the latest technology, this problem will continue to hinder some credit union reporting issues as they continually upgrade their regtech.

One clear observation for all credit unions is that they find it difficult to stay updated with ever-changing and new regulations. Not only is there a need for an organized clearinghouse for regulations, interpreting those regulations is another challenge, and confusing to the point that interpretations can even vary among different regulators.

The Great Hope for Regtech

Often credit unions hope new regtech would permit them to improve efficiencies by automating processes, and that the technology would solve the "regulation" problem. Unfortunately, regulation technology, although consistent, does not yet perform at the level of human expertise. As credit unions explore and experiment with applying more technology to assist with tasks, the need for experts in regulatory compliance will be greater than ever. It won't matter how much of an investment has been made in regtech if the credit union lacks an expert who understands the regulations and their purpose, and who can evaluate how well new technology is performing to fulfill regulation requirements.

So, what are the implications for credit unions as they navigate regtech?

Keep your regulatory experts close at hand. As you adopt new technology to improve internal efficiencies around regulatory compliance, keep your regulation experts close. They alone can be responsible for knowing if your technology is performing what it needs to do, and regardless of your technology, your credit union is ultimately responsible for compliance.
Adopt the right attitude about regulatory compliance. Regardless of what we might feel, regulations exist to protect members, not to drive you mad. It's important to remember this is the ultimate goal when administering to regulatory tasks. An open mindset will go far to help your credit union succeed at managing regulations and will also provide space for innovative ways to problem-solve as issues arise.
When challenged by keeping informed of new and changing regulations, leverage the cooperative spirit of credit unions to reach out and collaborate. Ask others how they interpret regulations or join a group, trade association or CUSO, to gain access to other compliance specialists.
When choosing regtech, insist that the product integrates well with your core system. As new regtech continues to rapidly enter the marketplace, core providers will endeavor to better align their systems' API with new and upcoming technology.