Despite having your own bank account and access to financial institutions all your life in the U.S., it’s a different story entirely for millions around the world that do not have access to banking or are offered limited opportunities. This inhibits their financial freedom and limits their ability to start a business and further better their economic position.
Even with the U.S., there are many people without access to a bank account, which means they can’t establish credit or even rent a home. Then, there are new types of businesses — many still considered high risk like cannabis — that also seemingly cannot work with traditional bank systems to even accept payments due to issues with what they are selling and the inability of traditional financial institutions to change.
RegTech is aiming to disrupt the banking system and give it a very necessary overhaul to open up financial options to more people and businesses everywhere.
What is RegTech? How is RegTech is Shaping Banking
RegTech is short for regulation technology. It has emerged as a new business segment of technology products designed to address regulatory requirements in ways never used before. According to Deloitte’s report on RegTech, there are some key characteristics that define what it does for banks, businesses, and consumers. This includes agility through the use of ETL (Extract, Transfer Load) technologies. Other characteristics include speed, integration, and analytics to improve understanding, financial decisions, and overall transaction efficiencies.
Examples of RegTech in action are growing. There are now solutions like reconciliation software for the funds industry and solutions that offer online fraud prevention that scan transactions for their authenticity. Other types of software includes platforms for supervising companies for organizations to use like a central bank or tax authority. Banks can also take advantage of solutions that give them a way to assess compliance risk. More tools and software are emerging as startups discover new ways to address the need for change across the global banking industry.
Radical Changes to Banking
Since the financial crisis of 2008, there’s been a clear need to overhaul the banking industry. The response has been to create more and more regulation in an attempt to stop any repeat of the bad behavior of banking’s past where there was no due diligence so anyone could get a loan. While the compliance helped stifle those poor decisions, the compliance has also become a huge burden with mountains of paperwork and a cumbersome process that has slowed the ability for banks to do their jobs.
FinTech companies emerged to help banks but mostly to assist those that were turned down by these banks. The result has been the migration to numerous alternative payment and banking systems that consumers and businesses enjoy more. That’s because they offer new ways to move money quickly as well as digitizes the entire process to save time and money. This has put banks at a disadvantage as they now feel threatened by these upstarts.
Regulations That Also Hinder Business Opportunities
Despite the advantages of FinTech, some of the same problems persist because the traditional banking system is still so ingrained in society and the business environment. While more people have access to financial tools and platforms, the regulatory environment has many in a chokehold.
The extent of the regulations has also created a very narrow-minded banking system that is not aligned with the significant disruptive businesses that are creating new opportunities and stimulating the economy. Startup founders and freelancers, who are generating revenues that have helped to resuscitate the economy, have found that they just can’t work with traditional banks to get financial support.
New businesses like those now popping up that provide cannabis for medical and retail customers thanks to changes in other regulations still find themselves unable to operate easily. That’s because traditional banking systems do not approve of doing business with them and even turn down requests for merchant accounts and other payment processing systems.
The Overall Impact of RegTech
Think of RegTech as the way to let FinTech companies do what they do best, which is open up the financial system to more people and opportunities. Companies like KIND Financial, which offers compliance software for cannabis companies and government regulators in partnership with Microsoft, are examples of new startups that are responding to the need for compliance while helping companies in the cannabis industry have the opportunity to grow and thrive now that they have been legally allowed to operate.
Dave Peck, Chief Marketing Officer for KIND Financial, explained, “California’s cannabis laws are specific to the state compared to what Colorado or Nevada require, which can be confusing for cannabis startups that want to ensure they are compliant. Our technology provides a centralized compliance infrastructure to provide full transparency while also ensuring that each company does not put themselves at risk for fees, penalties, or even closure.”
Peck further noted that banks and other institutions can also use their compliance software to work with these companies and feel confident that they are doing so in a legal way. This opens up new opportunities to provide payment processing, business banking accounts, and loans to these new types of businesses that they would have passed over previously. It also illustrates what is just the beginning of a significant impact on banking that will add innovation and enable these institutions to continue even in the face of alternative financial and transaction environments. The future may hold collaborations between financial institutions, FinTech companies, and RegTech firms, realizing that working together is much more beneficial than trying to compete with each other.
This post is part of our contributor series. It is written and published independently of TNW.
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