How could regtech ease the compliance burden?

Community banks are increasingly turning to regulatory technology to help them be more efficient and effective in their compliance efforts.

By Karen Epper Hoffman

With the industry abuzz about all things fintech, it can be easy to forget that technology is being applied to support and streamline banking efforts in compliance as well as retail delivery product and service innovation.

Indeed, regulatory technology, or “regtech” as it is commonly called, is attracting attention from compliance-savvy banks that realize that the ever-growing tide of regulatory demands could easily drown them (and their limited resources) if they do not implement more automation and more efficient processes. New regulatory technology offerings are entering the market, promising to help community banks work smarter in everything from risk management and compliance to transaction monitoring and identity management.

“As compliance requirements continue to increase, we’re seeing more banks turn to technology to help ease the burden,” says Justin Robinson, managing director for financial institutions for professional services firm CliftonLarsonAllen LLP. Initially, community banks embraced automated anti-money laundering (AML) systems, which, Robinson says, “didn’t necessarily reduce the amount of hours needed for monitoring BSA risks [but] made monitoring much more effective.”

Stewart Fitz Gibbon, executive vice president and chief risk officer for Geauga Savings Bank in Ohio, says, “The regulatory environment, primarily BSA, has been the source of a lot of our investments in technology and the people needed to run it lately.” Though Fitz Gibbon came to the $295 million-asset bank from a much larger bank, he says Geauga puts about the same amount of money into its regulatory technology as a bank twice its size, largely to keep up with changing regulatory requirements and to appease the regulatory examiners themselves.

“Regulators are forcing automation,” says Fitz Gibbon. “Not so long ago, this all used to be done with paper and pencil. Now we need the additional technology to make it happen.”

Jim Kleinfelter, Geauga’s president and CEO, agrees that examiners expect to see reports in automated form. But the embrace of technology has been more evolutionary than revolutionary, he points out. “It’s been a gradual move,” says Kleinfelter. “We’ve been talking about this for 15 years. Government agencies don’t move with lightening speed.” Fitz Gibbon adds that cybersecurity concerns have added “a greater sense of urgency” to regtech developments.

“Regulators are forcing automation. Not so long ago, this all used to be done with paper and pencil. Now we need the additional technology to make it happen.”
—Stewart Fitz Gibbon, Geauga Savings Bank

The move to greater automation has other benefits for banks, according to Kleinfelter. “Once implemented, there are efficiencies to be had,” he says, pointing to printing, paper and record storage costs.

With many new regulations focused on real estate lending, Robinson says the industry is starting to see more technology that aims to ease that compliance burden. “With difficult real estate lending compliance requirements involving Ability to Repay, TRID and now HMDA, we’re starting to see better technology to assist with compliance,” he says. “These technologies to help real estate lending can be vital to ensuring compliance with the rules.” Among other benefits, they can help reduce the number of hours staff members have to dedicate to ensuring compliance.

Kevin L. Petrasic, partner with law firm White & Case, has seen a tremendous adoption of regtech for managing BSA, AML, KYC and fraud prevention requirements “even among some of the smallest community banks.” Largely working through third-party service providers, community banks are now using software that is “light years ahead of five years ago,” Petrasic adds. “There are lots of other areas where regtech offers tremendous potential. Community banks are becoming more sophisticated consumers of regtech. … And looking at AI and sources of data derived from more sophisticated algorithms, there is lots of opportunity for community banks.”

In addition, many add-ons to standard conventional technologies are “transforming the space for banks,” says Petrasic, who is a former bank regulator. “For community banks, this software is becoming an equalizer.” Without as much expense sunk into older, less-flexible core systems, community banks are able to employ a greater variety of regulatory technologies at “a cheaper price, and be more cost-efficient” than larger banks, he adds.

“These technologies to help real estate lending can be vital to ensuring compliance with the rules.”
—Justin Robinson, CliftonLarsonAllen

While community banks rely largely on core service providers for their regtech needs, Robinson says larger community banks are also looking to third-party vendors that specialize in this space. Many of these vendors, he says, “provide a certain technology that is the only product they offer, and oftentimes, they do it well.”

“Many banks had to rely on the third-party service providers to help ensure compliance,” Robinson adds. “Going forward, I think you’ll see more vendors offering technology solutions to help ensure the accuracy and integrity of this data. We currently have several options for this, but I think it will be an area where we see additional growth for regtech solutions.”

Karen Epper Hoffman is a writer in Washington state.