A growing number of banks, financial services companies and even a few regulators are turning to regulatory technology—regtech—to trim runaway costs while also improving the effectiveness of their compliance programs.

An outgrowth of fintech, regtech uses digital technologies—including Big Data analytics, cloud computing and machine learning—to automate risk management and compliance, enabling companies to stay abreast of regulatory changes, facilitate regulatory reporting and support strategic planning.

Large banks operate under multiple sets of rules that require capital and liquidity reporting, recovery and resolution planning, stress testing and various other requirements, all of which demand collecting data and engaging expertise from every corner of the organization. Regulations in a number of areas—including anti-money laundering (AML), sanctions and taxes—require detailed customer due diligence practices. Regtech can automate these processes, sometimes through techniques already proven effective in the payments context.

Although regtech offers many of the same benefits to regulators as it does to financial institutions, few regtech providers have emerged to serve the specific and significant needs of regulators.

To minimize exposure and maximize benefits, those starting down the regtech path should develop clear perspectives on how to manage five broad categories of risk: uncertain development paths; provider reliability; increased regulatory scrutiny; limited judgment; and privacy.

As the space matures, regtech will become prevalent throughout the financial services industry and an increasingly important aspect of the regulatory process. Early adopters that manage the risks and challenges of regtech could gain competitive advantages through streamlining and making their existing compliance programs more efficient and cost-effective.