RegTech and FinTech: What’s the Difference?
by Kristina Drye, on Oct 19, 2021 3:11:29 PM
Since the advent of the internet, banking has developed into a digital phenomenon. Most of us don’t carry cash anymore - many of us don’t carry cards anymore, either. It isn’t necessary to visit a bank to complete a transaction, file for a credit card, or even deposit a check. In fact, there are a handful of banks that are cashless and even some without brick-and-mortar addresses.
As the financial industry innovates, the terms “fintech” and “regtech” are everywhere. But what is the difference? What is fintech, what is regtech, and what do they really do?
Financial Technology (Fintech) is defined as a technology that either improves or automates the delivery and usage of financial services. This can refer to both back-end technologies and front-end technologies. The first true fintech was probably the abacus - but now it includes everything from the ATM to digital banks, digital wallets, and the ability to bank with no brick-and-mortar base.
Many fintech initiatives that we take for granted today were instituted in the 1960s-1970s as part of the first fintech wave: Fedwire was created in 1970, and SWIFT (the Society of Worldwide Interbank Financial Telecommunications) was founded in 1972. Online banking was pioneered by Wells Fargo in 1995, followed by APIs and smartphone financial service development following the 2008 financial crisis. Today when you use Venmo, Apple Card, Google Wallet, Acorn, or $CashApp, you are using fintech.
Regulatory Technology (Regtech) describes the use of technology-based regulatory process management within the financial industry. Rather than enabling the use of financial services, regtech monitors regulatory reporting and ensures financial institutions are following financial regulations. Regtech includes anything that enhances regulatory compliance, including “know your customer” (KYC) processes and data management processes.
The CFA Institute Research Foundation has identified three distinct stages of regtech development. The first stage was defined by large institutions using technology in their internal processes to address an increase in compliance complexity. The disaster of the 2008 global financial crisis laid bare the faultlines of this first stage of regtech. The second stage was driven by the post-2008 crisis: increased KYC and anti-money laundering (AML) requirements abounded. At once the regulatory regime became more complex and more expensive and drove institutions to innovate their regtech tools. The third stage, in progress, will be defined by a shift from “know your customer” to “know your data,” and will include cybersecurity and privacy concerns.
Bringing Them Together
Fintech and regtech are often considered part and parcel of each other. In some circles, regtech is considered a subset of fintech. But really they are separate phenomena, though they developed (and continue to develop) parallel to one another.
In its simplest form, fintech is the use of technology to deliver financial solutions. But all financial solutions necessitate regulation and compliance processes, which is the domain of regtech. While fintech enables transactions to occur between parties under the auspices of a variety of financial institutions, regtech enables monitoring of environmental, social, and governmental (ESG) matters. Regtech can be effectively used to monitor supply chains, review data, assess risk, and screen and vet any amount of entities at a variety of stages of the transaction process. If used correctly, it can reduce cost and complexity while increasing the precision of risk assessment and your compliance practice.