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How Regtech can boost customer experience

Compliance is about more than avoiding fines. It’s about working together to deliver more efficient, more secure solutions that promote innovation and a positive customer experience, says David Jeffrey, Barclaycard Director of Fraud and Security.
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First there was fintech. Then came insurtech, proptech and edtech – a growing army of buzzwords coined to describe the adoption of emerging technology in different sectors.

Regtech is another such invention. As the name suggests, it’s technology that focuses on helping financial services companies manage regulatory compliance more effectively – often by harnessing technologies like AI, machine learning, blockchain and data analytics. While some see regtech as a subset of fintech, others disagree: a 2017 article by CFA Institute argued that regtech “should be considered a connected but distinct phenomenon.”[1]

In the payments arena, it’s no surprise that vendors are focusing on addressing regulatory challenges. Since the financial crisis, attentions have been sharply focused on this area and a 2018 report by KPMG noted that financial institutions now spend an estimated $270 billion annually on compliance. The research also predicts that regtech will account for 34% of regulatory spending by 2022 – up from 4.8% in 2017[2]. That’s quite a growth trajectory.

The regtech universe

Of course, regtech is not a homogenous area. Just as the challenges brought by regulation are both numerous and diverse, regtech incorporates a wide range of regulatory topics from reporting and real-time transaction monitoring to Know Your Customer (KYC) and anti-money laundering (AML). In fact, Deloitte has mapped out the ‘regtech universe’ by dividing solutions provided by over 200 regtech companies into five main categories: compliance (34%), identity management and control (24%), risk management (20%), transaction monitoring (11%) and reporting (11%) [3].

Regtech will account for 34% of regulatory spending by 2022.

When it comes to payments, it’s clear that regtech companies are casting the net wide. Taking advantage of cutting-edge technology – such as AI, machine learning, blockchain, big data and APIs – they are tackling a range of regulatory challenges by standardising processes, bolstering security and generating greater insights from the data available. And that’s of value to everyone in the payments ecosystem. 

Challenges and solutions

For one thing, the changes brought by PSD2 include the need for payments over €30 to address Strong Customer Authentication (SCA) by including a two-factor authentication process for some transactions. When applicable, customer identity will need to be verified using two out of three of the following categories: something the user knows, something the user possesses and something the user ‘is’ – potentially leading to more friction within the payments process. This has led to the development of some innovative regtech solutions, such as AI-assisted two-factor authentication services.

Other challenges – and regtech solutions – include the following:

Customer on-boarding. KYC, AML and counter terrorism financing (CTF) regulations have increased the complexity of the customer onboarding process. Regtech solutions include face-to-machine video identification processes, as well as automated digital KYC services.

Transaction monitoring. Regtech also has the potential to transform transaction monitoring, drawing upon innovations in technology to tackle financial crime more effectively. Feedzai, for example, uses machine learning to support fraud prevention and AML for banks, acquirers and merchants, processing live transactions and scoring risk in order to make instant decisions.

Regulatory overload. Simply keeping on top of payments-related regulatory change and understanding the impact of new rules can be a major challenge. Some regtechs are therefore supporting regulatory monitoring by providing information services and publishing information about regulatory changes.

What about customer experience?

While addressing ballooning compliance costs and avoiding massive fines may provide more than enough motivation for banks to explore the benefits of regtech solutions, there’s more to it than that. 

Regtech will enhance customer experience and help overcome regulatory challenges.

For the financial services industry, delivering a positive customer experience while keeping on top of continuous regulatory change is an ongoing challenge – particularly with PSD2 making it easier for third-party providers to compete with traditional banks. A report published this year by Fenergo states that poor customer experience costs banks $10 billion in revenue per year [4]. After years of focusing on compliance, the report notes that “banks are beginning to manage regulatory change in a business as usual (BAU) manner, while placing a greater focus on the customer experience.”

Again, this is something regtech can help with. By streamlining processes, organising data more effectively, extracting patterns and issuing predictions, innovative new solutions will be well placed to tick both boxes: giving customers an enhanced experience, while also providing the solutions to regulatory challenges.

As such, banks are increasingly entering into partnerships and incubation programmes with regtech providers in order to harness the opportunities of these developments – and the benefits will be felt across the world of payments, right to the consumer.

How do payments shape the customer experience?

Payment interactions are the most frequent point of customer experience, giving companies significant opportunities to shape customer perceptions, capture valuable data and build loyalty.

Our whitepaper uses new research and expert opinion to investigate the impact that payment technology can have on the customer experience.

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