Regtech is the latest cool kid on the tech block.
Burdensome regulation in the financial services industry is driving interest in regulatory technology (regtech) both 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.
This increased interest has resulted in a number of regtech providers coming up with solutions to simplify issues of compliance.
Learn more about this growing sector.
What is Regtech?
Regtech is innovative technology developed to address regulatory challenges faced by most financial services businesses, including banks, wealth and asset managers, and even businesses in the property industry, according to Collett.
The technology helps institutions with significant cost reduction as branch infrastructure and paper costs are no longer needed, resulting in better customer experiences. It also helps institutions avoid hefty fines associated with non-compliance.
Often, banks struggle to take advantage of regulatory changes because they are usually risk-averse and suffer from inertia.
What Compliance and Regulatory Issues Does Regtech Solve?
Regtech can focus on everything from compliance, risk management, regulatory reporting, and transaction monitoring. In South Africa, the primary focus has been on identity management, particularly Know Your Client (KYC), a requirement of the FIC Act.
KYC comes into play when onboarding new clients, requiring customers to visit branches and produce their identity documents. Each industry has its own set of regulations and requirements.
These regtech solutions ensure complete compliance, especially with the shift from a rules-based to a 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.
With digital security being prioritized globally, it is increasingly important for future-minded financial institutions to consider international regulations, says Collett. Regional regulations can impact institutions operating within a specific area and those doing business with them. For example, PSD2 in Europe could also affect South African institutions.
In Europe, regulations under the revised Payments Services Directive (PSD2) require banks to provide third-party providers access to their payment services and account holders’ information if the account holder gives their consent. It also stipulates that banks implement strong customer authentication measures to protect customers and secure transactions.
Key SA Regtech Companies to Watch
Companies like DocFox, ThisIsMe, and StriderTech are leading in the space.
DocFox aims to simplify the FICA approval process by managing the process of requesting, verifying, and storing documents. ThisIsMe is an identity verification startup, and StriderTech’s technology enables large financial institutions to rapidly deploy intelligent technology.
Entersekt, an innovator in push-based authentication and app security, also operates in the regulatory space by helping banks comply with regulations while ensuring customer information is protected.
Fintechs Innovating in the Regtech Space
Often, banks struggle to take advantage of regulatory changes because they are usually risk-averse and suffer from inertia. Certain fintech businesses are stepping in to fill this gap, says Collett.
For example, Mama Money, Africa’s first cashless money transfer operator, was quick to act and announced that clients could complete FICA with a selfie—a solution traditional banks would struggle to implement. Mama Money operates in nine countries throughout Africa.
Fintech players can grow their businesses through regulatory innovation, says Collett. When TYME digital bank launched initially in South Africa, it managed to acquire 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.
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.”
