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AI & Future Technologies

Financial institutions are increasingly eyeing fintech & regtech tools, but so are regulators

Zach Warren  Manager for Enterprise Content for Technology & Innovation / Thomson Reuters Institute

· 6 minute read

Zach Warren  Manager for Enterprise Content for Technology & Innovation / Thomson Reuters Institute

· 6 minute read

As more and more financial services firms utilize fintech and regtech tools to make their operations more efficient and effective, regulators are also taking notice

Financial technologies (fintech) and regulatory technologies (regtech) are beginning to see more use across the board, according to a recent survey from Thomson Reuters Regulatory Intelligence (TRRI). However, with their increased growth comes more attention from regulators — and if the experiences of large banks are any indication, financial industry institutions of all types and sizes may want to make sure their fintech and regtech usage complies with applicable data laws.

Fintech & regtech usage today

According to TRRI’s Fintech, Regtech and the Role of Compliance in 2023 survey report, which surveyed global financial services institutions about their fintech and regtech planning and use, fintech and regtech is being utilized for a wide variety of reasons. For example, in fintech, uses involving information/data security were cited by one-quarter of respondents, while uses involving payments (22%), customer relationship management (21%), and credit risk analysis (16%) were also ranked as top reasons for use.

In regtech, meanwhile, cyber resilience was cited by 20% of respondents, while compliance monitoring (16%), financial crime/anti-money laundering/sanctions (14%), and onboarding (14%) also were ranked as the top reasons for usage.

This wide array of uses for fintech and regtech may be not only because of the flexibility of today’s tools, but also because of the sheer number of technologies falling under the fintech and regtech banner. For example, fintech comprises, there were 12 different use cases capturing at least 5% of respondents. Indeed, Columbia University calls fintech a “catch-all term” that includes “software, mobile applications, and other technologies created to improve and automate traditional forms of finance for businesses and consumers alike.” This includes pieces of technology as disparate as mobile banking and payment services, wealth and financial management services, and e-commerce platforms (including for cryptocurrency). Regtech, meanwhile, is often seen as a subset of fintech, offering its own variety of technologies including compliance management, regulatory reporting, and risk assessment tools.

With all these potential pieces of technology and use cases, it’s not surprising to see that budgets for these solutions and the skill sets needed to operate them are growing in tandem. Among the survey respondents, 42% said their budgets for fintech solutions were growing, while 38% said the same for regtech solutions. Meanwhile, just 10% and 13%, respectively, said their budgets for those solutions were shrinking, while the rest either said budgets were static or they did not have a set budget for fintech/regtech solutions.

To operate these solutions, more than half of respondents (57%) said they have had to widen skill sets within their risk and compliance functions to accommodate fintech solutions. Nearly one-quarter (22%) of respondents reported going even further and investing in specialist skills for fintech tools, including 38% of all respondents in the U.S. While fewer companies have invested in specialist skills for regtech tools (11%), nearly half (47%) still reported needing wider skill sets to accommodate these tools.

Taken together, it’s clear that the prominence of fintech and regtech tools within today’s financial institutions is growing. In many places, governments are promoting this change as well. “The increasing prominence of fintech and green and sustainable finance have been a game changer to the global financial industry,” said Arthur Yuen, deputy chief executive, Hong Kong Monetary Authority, in June 2022. “Financial institutions across the globe are actively looking for experts with relevant knowledge and skillsets to help develop innovative fintech solutions or sustainable investment products, [and] manage the climate risks.”

Regulators on the line

Yet, even as governments see the benefits of fintech and regtech usage today, their own regulators are also taking a closer look at how those fintech and regtech platforms are operating. “Technological solutions offer the possibility to deliver tremendous benefits and we should be ready to harness them,” said Elizabeth McCaul, member of the Supervisory Board of the European Central Bank, in a July 2022 speech. “But any technology solution needs to be buttressed by three pillars: an appropriate regulatory framework, sufficient supervisory oversight and […] a deep understanding […] not only of the potential but also the limitations and risks of new technologies.”

In the TRRI report, some financial institutions report that they have already had contact with regulators concerning their use of these technologies. More than one-quarter of respondents (28%) said they had already spoken with regulators about fintech, 57% said they had not, and 15% did not know. For regtech, 21% said they had spoken with regulators, 59% said they had not, and 20% did not know.

The report, however, also broke out the responses from the largest global systemically important banks (G-SIBs). Among this population, as many said they had spoken to regulators as had not — 43% of respondents, while the rest said they did not know. That half-and-half figure was the exact same for both fintech and regtech solutions.

While it may be unsurprising that the largest financial institutions are the ones more likely to be speaking to regulators, the report noted that G-SIBs are often a harbinger of future technology trends. In this instance, it could mean that regulators are gaining familiarity with fintech and regtech tools, with an eye toward expanding their purview to the wider financial industry in due time.

“More widespread use of fintech/regtech by regulators themselves means that firms of all sizes would be well-advised to initiate regular, in-depth conversations with their regulator on the use of fintech and regtech,” the report proposes. “This might help bridge the apparent disconnect between firms and their regulators.”

Regulators and lawmakers alike have already indicated an increased interest in fintech, particularly following the collapse of crypto-exchange FTX and the related cryptocurrency fall-out. In the U.S., CFTC Commissioner Kristin N. Johnson called explicitly for legislative action, noting, “I am hopeful that Congress will identify a whole-of-government approach to ensure that we prevent schemes that rely on regulatory arbitrage or take advantage of the regulatory gap that currently limits our visibility into digital asset trading markets and stymies our ability to adopt rules necessary to effectuate our mission in these markets — to protect customers, ensure market integrity, and foster fair, orderly, and transparent markets.”

Congress may very well answer the call. Around the same time as Commissioner Johnson’s call to action, U.S. Sen. Sherrod Brown (D-Ohio), Chair of the Senate Banking, Housing, and Urban Affairs Committee, said in a release, “It is crucial that risks in this area are contained and do not spillover into traditional financial markets and institutions, and we draw the correct lessons regarding customer and investor protection.”

Ultimately, fintech and regtech can provide a host of benefits to an organization, including improved efficiency and speed of processing, improved data management, better risk monitoring and more. These solutions may even become a necessary requirement for the largest financial industry firms.

However, those institutions exploring their use would do well to not only examine the technical and operational aspects of integrating these technologies, but the potential external regulatory risks that these tools can bring as well.

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