2.5 billion people around the world are un- or underbanked. For reasons as mundane as the lack of a credit history, or being a new migrant without the right papers, a third of the world’s population is excluded from our economic system. That not only leaves them without financial security, but without access to the job market or the ability to rent a home.
Recently, that tide has started to turn. And with the rise of RegTech, it’s about to turn further still.
Risk-takers and Innovators
Since the financial crash of 2008, financial services have faced a mountain of regulation. As the compliance burden on banks has increased, compliance teams have ballooned – to 30,000 staff in the case of Citi Bank.
While incumbents were struggling, innovation found its way in. FinTech – tech-enabled financial services – has exploded over the last few years and now it’s threatening to close the gap on traditional banking. Focussed on customer need first and often catering to new markets, the FinTech boom has already gone a long way to opening up access to new users. From female-focussed investment apps like Joy, to champion of the underbanked Pockit, FinTechs are making financial services available to more people than ever before.
But despite the new approach, the same old problems persist. Offering services like spending, sending and lending money in unchartered territories is a risky business, and the strong chance of exploitation means that close and evolving regulation of the space is a necessity. If banks – the sensible, risk-averse adults of the ecosystem – are frustrated by such restrictions, the problem is even worse for FinTech’s rebellious, experimental teens.
Tackling Compliance with Tech
Like many a dysfunctional family, the key to greater harmony is communication. The UK’s Financial Conduct Authority (FCA) has launched an industry sandbox for exactly that purpose, offering a forum for continuous feedback between FinTechs, incumbents, regulators – and RegTech.
RegTech, or regulation technology, translates complex regulation into API code. It streamlines burdensome compliance processes to keep both risk and human resources low. And there’s an urgent need for it: startup FinTech providers simply don’t have the means to hire an army of compliance officers. With new regulatory technology, they don’t have to.
Innovations including machine learning, biometrics and distributed ledgers help ensure compliance with fewer resources, and the benefits are significant. Instead of only onboarding 70% of ‘good customers’, FinTechs can onboard 95%, and can do it automatically – putting their limited human resources to better use on the 5% that require human judgement.
In so doing, RegTech is helping to eliminate the historical access vs security standoff, solving a pain point for financial services and the 2.5 billion underbanked worldwide.
Balancing Access and Security
FinTech can help the unbanked gain access to micro-financing and remittance, and is booming in the 90% of emerging markets that only use cash. But 3.5% of the world’s GDP - equal to around $1tn – is laundered money used for human trafficking, drug dealing and worse. FinTech’s greatest strength is its ability to boldly break into new markets. It’s also its biggest risk.
Roughly 150 RegTech companies now exist to help balance this. At Onfido, we automate KYC processes to make them as easy as taking a photo of an identity document and a selfie. Companies like ComplyAdvantage deliver sanctions and watchlists searches at scale, while Featurespace offers behavioural monitoring to identify fraudulent activity.
With RegTech to manage the burden of compliance measures, risk is removed for FinTechs, leaving them free to continue offering access to those currently excluded from our financial system. RegTech isn’t just innovative – it’s revolutionary.
In spite of this, some still aren’t ready to rethink regulation. Regulators tend to fall into two camps. In the first camp are those those with the objective of preventing malpractice, often by stopping all innovation. In the second are those with the objective of helping consumers gain access to new services while preventing malpractice. Fortunately, the UK’s FCA falls into the second.
The FCA’s message to regulated companies has not been to prescribe solutions, but to support experimentation. If new technologies can prove they meet compliance requirements faster and better than existing ones, they’re welcomed. Small FinTech and RegTechs are invited to join the conversation alongside the largest incumbents, and have turned regulation, often seen as a drawback by foreign investors, into a strategic asset for the UK. Since the UK remains a global leader in both FinTech and RegTech, it’s an approach that seems to be working
In contrast, Germany has so far resisted innovation that could help bank the unbanked. Recent legislation sticks with the status quo, encouraging offline compliance methods rather than allowing for digital onboarding to financial services. Not only is this costly for FinTechs, it’s difficult for customers and excludes those with limited credit history.
The RegTech Revolution
Nonetheless, the RegTech revolution is already making its presence felt. Pockit Bank can provide any one of the 4m unbanked in the UK with a debit card thanks to RegTech that keeps risks low. Transferwise and World Remit are bringing the cost of remittance down from its average 16% transfer fee.
FinTechs like these are growing because incumbent financial services weren’t meeting the needs of a growing, unserved customer base. Now, those incumbents are starting to follow suit. Slowly, even the biggest banks are starting to innovate and extend their offering to more users. It’s in all our interests; a 1% increase to financial inclusion could add 3.6% to GDP.
Even greater improvements are entirely within our reach. By rethinking regulation, financial services from across the spectrum can scale, and scale securely. The RegTech revolution is coming – and it’s bringing the 2 billion unbanked with it.