The fast-paced advancements are eliminating the stereotype that finance is a boring industry. Financial technology provides cashless systems, digital cards on smartphones, and, of course, the safety and security of these transactions to a variety of customers. The market is booming with expected growth of 16.8%, which amounts to $681.6 billion by 2028.
There are many types of Fintech software development services, including regulatory technology — Regtech — that services compliance and risk teams. It has experienced market growth of over 73% since 2017, so it’s no wonder that 78% of startup deals utilized it that year.
Both new technologies are a huge point of interest to the financial and banking industries, but what’s the difference? This article will show the difference between Fintech and Regtech.
In this article:
What is FinTech?
Fintech is a business solution that offers new ways of delivering traditional financial services. Financial technology manages, records, and stores important transactions, delivering complex entries in seconds. Blockchain technology, internet banking, and mobile banking are examples of Fintech.
Fintech development services provide safety and security to businesses that want to create such solutions, taking into account Fintech regulations. A small error or fraud in the balance sheet would harm the business's reputation and have a ripple effect. Instead, robotic process automation (RPA) ensures transparency and provides backup for essential data.
Why do we need Fintech?
FinTech platforms have the potential to transform the financial aspect of businesses. Whether you’re paying insurance or checking stocks, the need for such technology is growing. Here are some reasons why:
- Easier access to financial services. FinTech is a game-changer for countries where infrastructure hasn’t developed. As long as there is mobile or broadband internet, you can, for example, open a bank without a physical location.
- Safety and security.The traditional approach has loopholes in data security. Because of that, fraud or scamming becomes a critical issue. However, FinTech solutions provide high transparency and cybersecurity and enhance consumer protection.
FinTech is a transforming solution for the financial services industry and many businesses, as it facilitates online payments and wire transfers. Let’s look at the major technologies supporting FinTech.
Main technologies supporting Fintech
The USP of Fintech technologies is that they understand the nature of businesses. Here are some leading technologies that support Fintech.
- Artificial intelligence and machine learning – build a detailed user profile and predict behavior
- Blockchain technology – creates transparent and secure solutions
- Robotic process automation (RPA) – automates financial processes
Internet of Things (IoT) – develops mobile POS systems
Aside from this, FinTech employs several cybersecurity standards to protect data for these solutions.
What is Fintech all about?
During the evolution of the FinTech industry over several years, more than a dozen distinct categories have emerged, defining the landscape where companies operate.
1. Personal finance
These encompass mobile and desktop applications from startups that aid individual users in managing finances, analyzing expenses, and offering detailed forecasts of future expenses through comprehensive reports.
FinTech tools address the financial needs of over 2 billion people by providing access to fundamental financial services. Leveraging mobile internet, smartphones, and innovative transaction methods, they bridge the gap where traditional banking institutions are absent.
Among the most popular areas, facilitated by the ability to lend without direct involvement from banks. These startups operate via distributed registries, facilitating profitable collaboration between lenders and borrowers in both consumer and business sectors.
4. Money transfers
Startups in this domain facilitate bank-free money transfers, utilizing mobile platforms and streamlined authentication methods. Notable representatives include neobank Revolut, TransferWise for cost-effective international currency transfers, and Klarna for internet payments.
5. Investment platforms (Wealthtech)
Encompassing robo-advisors, digital brokers, micro-investment platforms, and personal finance data management programs, these platforms focus on automating and enhancing market accessibility for retail investors. Investors value them for predictive analysis and automation.
Companies in this sphere streamline and fortify data processing for banks, spanning from customer authentication to safeguarding against fraudulent schemes, aiming to ensure simpler and more reliable operations.
7. B2B Fintech
This direction targets resolving mutual settlement and data exchange issues in businesses, with a heightened focus on smart contracts based on blockchain technologies.
8. Big Data analysis
Nearly 100 FinTech startups specialize in leveraging big data for the financial industry aiming for a more systematic approach compared to how personal data has been used in advertising and PR.
A crucial area enabling businesses to automatically adapt to legislative and market changes.
Offering automated insurance products through mobile applications, payment automation, and interaction within the Internet of Things. Notable examples include U.S. car insurance companies utilizing "telematics" to determine insurance premiums based on clients' driving styles.
11. Artificial Intelligence
Although AI remains relatively underdeveloped, all financial companies are resolute in leveraging its potential to trim staffing expenses. Amazon, for instance, rolled out an AI-based algorithm in 2014. This algorithm employed as many as 500 computer models to sift through resumes in open databases of recruiting firms, matching candidates. However, in 2015, developers identified bias against female candidates within the algorithm. Despite attempts to rectify the issue, they couldn't ensure an error-free system, ultimately leading to the abandonment of the HR algorithm.
Crowdfunding platforms facilitate collective financing, enabling product creators and investors to collaborate further. Kickstarter and Indiegogo stand as the most popular platforms in this domain.
Neobanks, constituting solutions within the banking services realm, often manifest as mobile applications replacing traditional bank services. Tailored toward customers and devoid of physical branches, examples like Monobank and Revolut exist in this space. Neobanks, however, face challenges including a low level of customer trust and a lack of clearly defined regulatory standards.
Cryptocurrencies operate as a form of digital currency independent of a central payment system, automatically managed and mined by individuals using high-powered computing systems. Numerous startups, exchanges, converters, and investment platforms have emerged in the cryptocurrency sphere, amassing millions in capital. Despite this, the future of this industry remains unclear to financial experts.
Blockchain serves as a technology underpinning distributed data registries, where each participant acts as their own server, verifying the legitimacy of other users' financial operations. Renowned for its reliability, Bitcoin, the cryptocurrency, operates on this technology. Its applications span various sectors including executing smart contracts, validating copyright, implementing biometric security, facilitating trade and transactions, distributing energy, and even enabling voting.
Now that we have a better understanding of Fintech, let’s look at another valuable asset of the financial sector, Regtech.
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What is Regtech?
From what's outlined above, it's clear that FinTech and Regtech aren't classified under the same umbrella. Instead, Regtech is considered one of the subsets within the broader spectrum of FinTech. Regtech or regulatory technology helps businesses with regulatory compliance processes and ensures financial institutions adhere to the regulations.
Since the 2008 global financial crisis, regulations worldwide have changed significantly. Today, they are more complex and, thus, more challenging to manage risk and compliance. As an emerging technology, Regtech solutions are transforming the regulatory landscape of the global markets.
How can Regtech assist your organization?
Today, the financial sector is armed with Regtech tools and applications that benefit compliance divisions with the increasing regulatory environment. Here’s how Regtech assists enterprises.
- Lower fines. With Regtech, it's easier to follow up with the strict rules and regulations that authorities roll out, as financial institutions can monitor the changes in requirements in real-time.
- Prevention of legal ramifications. Regtech solutions help paint a more detailed picture of any client’s financial history and reduce the possible dangers of money laundering, funding to terrorist groups, and other fraudulent activities.
- Enhancement of responsibilities. The automated approach to compliance management processes helps identify suspicious activity much faster than if done manually, reducing the time needed to recognize and report a crime.
To follow up with compliances, Regtech supports major technologies. Let's understand them.
Main technologies supporting Regtech
Regtech assists with cost-effective and efficient solutions that enable businesses to meet compliance and regulatory conditions. Below are technologies supporting Regtech and why you may need them:
- Artificial intelligence and big data – validate which regulations apply to your business
- Blockchain technology – accesses real-time changes in regulatory requirements
- Machine learning – traces variations in new laws
- APIs – create reporting systems
- Data mining – supports better decision-making
It’s also worth mentioning that cloud computing and SaaS technology help make these solutions more accessible.
Regtech technology helps businesses by assisting with regulations. But, Regtech benefits financial institutions too.
Types of Regtech
Regtech encompasses a diverse range of regulatory monitoring solutions, categorized into eight distinct types.
Client identification solutions
These tools assist financial entities in gathering and processing information pertaining to both potential and existing customers. They encompass background checks such as Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols.
Focused on real-time transaction monitoring, this subset of regulatory processes technology aims to swiftly detect any potential breaches of regulations or suspicious financial activities.
Designed to aid companies in meeting their regulatory reporting obligations, these solutions involve collecting, processing, and submitting internal data to relevant authorities.
Data protection tools
Compliance tools that safeguard personal data in alignment with regulations like GDPR, offering comprehensive protection against data breaches and cybersecurity threats.
Data warehousing and analytics
This technology assists companies in effectively storing, organizing, and analyzing extensive volumes of data essential for legal compliance.
Legal and regulatory analysis
These tech tools monitor and interpret existing and emerging regulations. They aid financial institutions in identifying gaps or potential non-compliance within their internal structures.
Specifically designed to educate and train staff within financial companies about laws and policies relevant to their respective roles.
General compliance innovations
This category encompasses a wide array of Regtech that doesn’t fit neatly into the preceding definitions. It includes areas like forecasting and risk management modeling.
Importantly, no singular Regtech tool comprehensively covers all compliance needs. Financial entities typically adopt multiple solutions, creating a toolkit tailored to their specific organizational requirements.
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RegTech innovations for financial institutions
Regtech technologies can shape the finance industry and provide solutions by associating with FinTech technology.
- Regulatory Sandbox. Regulatory Sandbox is a platform for businesses seeking to comply with the regulations of Europe, Australia, and the United States of America. It provides analytical information based on data, so business owners can make informed decisions and exercise execution practices.
- Regtech as a Service (RaaS). Regtech as a Service (RaaS) fosters financial institutions to view Regtech as technological development to enhance working efficiency and regulations. Regtech is expanding by analyzing the wealth of internal and third-party data using bulk storage and artificial intelligence.
Regtech is an emerging technology, and some enterprises are serving clients globally.
Where does Regtech work best?
Regtech serves distinct purposes across various regions. In some countries like the USA and Australia, it primarily focuses on automating report generation and presentation. Companies in these regions offer cloud-based solutions that automate data collection, processing, and visualization, tailored specifically for financial institutions and regulatory bodies. Conversely, in the UK and Northern Ireland, Regtech is predominantly used for compliance control. Its applications include tracking regulatory changes, aggregating information on requirements, and identifying compliance risks.
Enhancing supervision and Regtech evolution
Efforts to enhance supervision and further the development of Regtech solutions involve collaborative initiatives between regulatory bodies and institutions. For instance, ongoing collaborations between regulatory bodies and associated organizations aim to conceptualize and implement innovative supervisory and regulatory technologies. These initiatives encompass steps such as:
- Developing integrated information and analytical platforms for process automation.
- Implementing comprehensive data collection methods for robust risk assessment.
- Expanding existing systems like Credit Registers to accommodate increased information volume.
- Introducing user-friendly dashboards for data visualization and accessibility.
- Establishing educational resources to improve financial literacy and portals for regulatory documents.
- Broadening access to relevant data registers.
- Engaging stakeholders in enhancing compliance processes and establishing regulatory sandboxes.
- Leveraging advanced technologies like Big Data and AI for identifying potential compliance breaches.
This proactive approach seeks to streamline supervisory processes and bolster the development of Regtech solutions, aligning with the evolving landscape of technological advancements and regulatory requirements.
Regtech companies you should know
Startups in the Regtech industry are relatively new, and entrepreneurs with vast experience are helping clients, not only with compliance but with criminal offenses.
- ChainAlysis. ChainAlysis is a US-based blockchain analysis enterprise that develops blockchain databases for public and private enterprises. The company also develops cybersecurity software, including anti-money laundering software for bitcoin. The company’s product portfolio includes REACTOR, an interactive investigation tool to identify criminals, visualize data, generate results, and deliver them to clients.
- ComplyAdvantage. ComplyAdvantage is a UK-based Regtech firm that provides financial crime risk data and detection. The firm’s focus is to counter the threat of money laundering, funding to terrorist groups, fraud, and other financial offenses. ComplyAdvantage serves over 500 enterprises in 75 countries to mitigate financial crime risks. The company identifies daily risks from millions of structured and unstructured data points.
- Ascent Regtech. Ascent Regtech is a regulatory solutions firm that streamlines the compliance process. The company works with AI-driven technology and human expertise to help businesses across industries with regulations, specifically the financial industry, by maintaining regulatory changes and reducing the risks of financial institutions and banking services.
- Forter. Forter is an NYC-based enterprise that delivers fraud prevention solutions to online business owners and entrepreneurs. The firm aims to create a fraud-free infrastructure for online business owners through which they can make decisions that benefit their businesses.
The company’s system is consumer-centric, accurately detecting offenses while enabling growth by increasing approvals and providing a better customer experience.
Despite being new, Fintech vs Regtech holds immense possibilities for mitigating risk and easing regulatory compliance.
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Identifying risks and enforcing the right tools to reduce them is the key for the Regtech and Fintech industry to grow and evolve. Today, businesses are operating with the many Fintech solutions available in the market, but as long as there is the presence of Regtech applications, enterprises can work smoothly and effectively.
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