Accelerated digital transformation of payment transaction processing has put pressure on the Banks to deliver innovative payment instruments to its customers. Alternative payment channels that are not credit cards, debit cards or cash are on the upswing. According to a report, the global mobile wallet market will reach approximately $ 3,142.17 billion by 2022, growing at a CAGR of over 20 percent. In India, after demonetisation, volumes of instant payments through NPCI promoted India payment stack, particularly UPI have grown beyond imaginable proportions. Government support for the “less-cash” country has fuelled the growth of the mobile wallet. Transactions from e-wallets of companies like PayTM, MobiKwik, Jio Money, Google Pay and State Bank Buddy have skyrocketed. The number of internet users multiplying at a breakneck speed has resulted in a booming e-commerce sector, which has given a further fillip to the growth in digital transactions.
Instant Payments and attendant challenges
The maturity in faster payment capabilities and the humongous transaction volumes have kept the payments ecosystem on its toes to ensure data privacy, customer-centricity, reliability and security in transaction processing. The gaining popularity of faster payments in the far-flung areas of the country, poses the challenge of driving agility in fighting the menace of ever-increasing threats of financial frauds. The different settlement cycles for various payment channels often give rise to financial slippages in absence of a unified reconciliation platform. A traditional approach to managing risks because of increasing fraud sophistication and diversity in reconciliation is far from adequate.
Increased Complexity, Volatility and Scope of Regulatory Requirements
The inexorable push for instant payment has changed the regulatory landscape. A few recent studies have suggested that the volume of global regulatory changes went up by at least five-fold in the past decade. The pace and magnitude of regulatory changes in India are no different. In the last few months, the Reserve Bank of India has brought in regulations for phase-wise implementation of LEI (Legal Entity Identifier), recommending PPI interoperability, enforcing data localisation, shifting to EMV compliant cards and ATMs, ensuring tokenisation of card transactions and implementation of as many as twenty-nine measures for fraud risk management. RBI has also issued instructions to make available a range of safety valves to protect prepaid payment instrument customers. As the volume of instant payments continues to grow exponentially, more reforms could be on the anvil. \
The scope and complexity of the regulatory reporting is significant and increasing year on year. This poses challenges for financial institutions not only around deciphering new legislation within strict deadlines, but also ‘translating’ it into their process framework. Every legislatorial update results in changes in regulatory rules that are imposed upon financial institutions. Banks and financial institutions spend billions of dollars every year to stay compliant. The Banks and PPI operators find it difficult to keep pace with a dramatic rise in a vast gamut of regulatory requirements and compliance obligations. According to an estimate, financial institutions could end up spending 10 percent of their revenues on compliance within the next few years. Inability to contain these costs can cause a severe dent in the profitability of Banks.
Experience suggests that the inability to keep pace with the speed and scale of regulatory requirements can cause the poor governance of sensitive customer data. Often, the data is heterogeneous and not integrated. A lack of coherence between the innovation efforts in these silos often creates challenges. The velocity, variability and volume of customer data deepen concerns about:
- Payment Data management
- Data protection and privacy
- Consent tracking while sharing of payment information
Growing compliance requirements causes building complex regulatory expertise. Globally 10 -15 percent of the total workforce in financial institutions are working in the compliance department. The costs of compliance shoots up significantly when Banks spend on hiring consultancy and advisory services.
Regulatory Technology aka RegTech to drive improved outcomes for end-customers.
RegTech is more than a buzzword. It is on the cusp of a breakthrough that may revolutionise the industry’s approach to regulatory compliance and risk reporting. It enables the Banks to use emerging technologies to automate the manual, administrative and often repetitive tasks to enhance risk management and strengthen regulatory compliance. The fusion of ‘regulation’ and ‘technology’, RegTech enhances the interface between Banks and regulators. It helps businesses in the payments industry meet the demands of both domestic and international regulations. It covers five key functions:
- Identity Management
- Risk Modelling, Prediction and Reporting
- Transactions Monitoring
- Regulatory Reporting
In the last couple of years, Banks are considering RegTech for a digitisation of the value chain from the onboarding process, to surveillance of financial crime, to regulatory reporting. It improves processes involving repetitive compliance sign-offs, which are highly susceptible to human errors. These include Know Your Customer (KYC), Customer Credit Scoring, Transaction Monitoring, Anti-Money Laundering (AML) Screening, Fraud Monitoring, Fraud Detection, Fraud Risk Analysis and Fraud Response, Disputes Resolution, Chargeback Reconciliation and Settlement, etc.
In the long term, RegTech empowers an organisation to embark upon a data-driven compliance program. The data-driven insights enable financial institutions to meet the demand of regulators. It helps them reduce cost and improve the quality and speed of delivering customer service.
The Banks have gradually recognised the significance of RegTech as part of their wider transformation strategy and are defining the business benefits they want to achieve. They are exploring the use of a combined power of new technologies like Payment Hubs, Artificial Intelligence, Machine Learning, Natural Language Processing, Distributed Ledger and Biometrics, in areas with formidable regulatory requirements. Some Banks use these technologies to augment their own risk monitoring, surveillance and supervisory capabilities.
Overcoming the Legacy Technology Trap
Whilst RegTechs are creating solutions with the capability to address new regulatory reporting requirements, banks will have to optimise and upgrade legacy reporting. Banks can quickly reap the benefits of RegTech by integrating financial data and enabling the testing of data robustness. Backward integration is a key consideration for Banks that are willing to utilise RegTech solutions. RegTech implementation needs collaboration between various departments, such as the business, compliance, technology, and legal departments. Knowledge of the regulatory framework and the key requirements in the compliance area is critical.
Embarking on an innovative RegTech Approach
The first step towards adoption of RegTech is the identification of high impact processes such as fraud risk management, enterprise reconciliation and exception management, and tokenisation. Banks can start with piloting a technology implementation on a small scale. It is also a quick and efficient way to explore new technologies and determine their possible long-term return on investments.
The next step would be to understand the digitalisation maturity and create a RegTech architecture that is aligned with the digital architecture. Financial institutions with a high digital quotient have an advantage over their traditional peers. An institution’s digital quotient is the extent to which processes, information, data and activities are in digital form. The digital quotient of the Bank would depend on:
- Digitisation of the number of risk and compliance activities and processes
- Availability of data
- Scale of conversion work
RegTech, represents a long-term change in the industry. The operational and cultural change that accompanies the creation of a novel regulatory architecture is one of the critical success factors. Focus on the complete picture, and a plan for the adoption of interrelated technologies is the key to success. Integrating RegTech solutions within an existing technology system becomes a force multiplier and enables financial institutions to improve agility, operational efficiency, financial transparency and lower the overall cost of compliance.
Digitisation is not a panacea to the problems posed due to the systemic shift in the regulatory landscape. Quite a few processes only rely on human expertise. Intelligent technology can amplify human ingenuity for decision making across jurisdictions. RegTech solutions are useful to automate the value chain and scale across multiple markets and jurisdictions.
Views expressed in this article are a personal opinion of Vivekanand Sangle, Head, New Initiatives, Electronic Payment and Services (P) Ltd.