Regtech: Beyond Fintech

Regtech is not limited to Fintech. Added value can be created at many interfaces between state, economy and society. Also for self-regulating industries. Regtech will develop if competition is allowed.

The term Regtech (Regulatory Technology) was coined in the UK in 2015 by the Financial Conduct Authority (FCA). The FCA had noticed that more and more technology-based solutions are coming onto the market that help to cope with regulatory requirements. In the aftermath of the 2008 financial crisis, financial markets were regulated at various levels: Increased national supervision, higher capital requirements for banks, stronger consumer protection in asset management, tax compliance of cross-border clients, etc. Due to the sheer flood of regulations and the very high added value of the financial markets, it was not surprising that Regtech was the first to develop as a Fintech category and attracted the corresponding venture capital. This close connection has helped the term Regtech to gain a high public profile and thus contributed to its acceptance. At the same time, it has unnecessarily restricted the meaning of the term (so-called semantics).

Regtech will go into breadth

Regtech can create added value for the economy and society not only in the area of finance, but also wherever the state intervenes to steer markets, secures public supply or is economically active itself with its commissioned organizations. In short, wherever natural persons and legal entities come into direct contact with the state, so that interfaces are created and the necessary processes are formalised by regulations. Since the low-hanging fruits in the financial market have already been picked, my thesis is that the focus of Regtech start-ups and venture capital, in addition to banking and insurance, will increasingly concentrate on other areas and offer solutions far beyond today’s known standards (no final consideration):

In economic policy, a fundamental question is how strongly the state can then intervene in the markets (see the basic article on the state and avenirsuisse’s regulation) and how supply should be structured. But there is no such thing as cost-neutral regulation. This is because every regulation generates costs due to staff expansion in the administrations and process inefficiencies (opportunity costs) on the part of the persons and companies affected by the regulation. Well, Regtech does not solve this area of tension, but does act as a bridge for a pragmatic approach.

Competition creates added value

Thus Regtech avoids a part of the resulting costs on both sides thanks to inherent process automation along the compliance, intelligent data analysis, new database models (blockchain), etc. The costs for the Regtech solutions themselves remain, but due to the scalability of the technology they are always smaller than the manual version. From an economic point of view, this development must even be desired, because the Regtech industry itself generates added value, raises the level of digitization and finally increases the attractiveness of the location. This presupposes, however, that wherever possible the state does not create solutions, but defines framework conditions in which the market can develop solutions and introduce them into the competition.

By the way, this does not only apply where the state intervenes directly. Regtech can also bring added value where industries regulate themselves. Regtech can improve compliance and transparency at minimal cost, thereby increasing confidence and ultimately making a central contribution to license-to-operate.

(Cover Photo: Sorasak on Unsplash)

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