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Regtech Should Becomea Mandate After Covid-19

By: Gabriel Chan, Head of Global IT, Gaw Capital

Gabriel Chan, Head of Global IT, Gaw Capital

The world has changed dramatically due to the Coronavirus Pandemic since January 2020. No one could have imagined how our world and our lives were impacted in such a tragic way, lots of human lives being lost, and there is substantial uncertainty on the impact of the global economy and people’s livelihoods. While on the optimistic side as an “IT guy,” Information Technology (IT)was proven to be the key to survive in a pandemic and will be the future for business growth.

Digital technology is one of the keys to survive in the pandemic

Different safeguard and containment strategies have been enforced by the government during the pandemic, such as social distancing measures, school closures, compulsory quarantine for travellers,  and temporary lockdown for some countries. All have a different level of negative impact to the business world, and the company needs to instantly come up with a response plan accordingly to protect their people and the business. Many of them make use of technology; for example, “Zoom” has become a buzzword for students and virtual meetings. Many people changed to online shopping when they stay home. In the business world, some company has been splitting the operation in the office or making use of the business continuity site, while most of the company allows their staff to work from home (WFH).. It’s especially challenging for those traditional businesses requiring face-to-face interactions or heavily rely on manual operations and paper documents. Those non-digital processes are difficult to operate or react in such a remote and virtual environment.

Virtualize business operation will become the norm

In the past, many companies, especially in Asia, have a concern about the WFH model from both operational efficiency and risk compliance points of view.. But now, the WFH model was proven to be success with several months of actual experience, haven’t said that after six months, we still cannot see the end of the tunnel yet. Some companies are even considering WFH as part of their strategic change to fully virtualize the business operation in order to downsize the office space and lower the rental cost. Additionally, there will be a stronger push for digital transformation from those legacy businesses to enhance their resiliency as a result of this crisis. Some aim to increase their competitiveness for business growth with the virtual eco-system opportunity as a future trend.

"Electronic KYC (eKYC) is another Regtech transformation with a remote, paperless process that minimizes the costs and traditional bureaucracy necessary in KYC processes"

Prepare for Future Banking

Same situation for the financial institutes to combat the COVID-19 pandemic, while remaining alert to new and emerging illicit finance risks. I don’t have a crystal ball that can predict the future but from the historical experience of the previous crisis and the changes in customer behaviour. There are some areas we should pay more attention and be prepared. 1) follow the pandemic crisis, very likely there will be a worldwide economic downturn or, even worse, a financial crisis. 2) Change of digital behaviour, customers adapt to a new lifestyle through the digital platform. 3)Increased regulatory concerns from the operational risk due to the pandemic, to the financial risk and the rising global market risks such as the high tensions between China and the U.S.

Increase financial crime risks

Criminals had already been taking advantage to carry out financial fraud and exploitation scams with COVID-19. If it becomes a global economic downturn, the financial crime risk will be significantly increased. As the pandemic continues without an end date, it was extremely challenging for the risk and compliance teams. High pressure on the function like Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT). Some of the banks have introduced Regtech solutions to assist. Powered by cognitive machine with in-depth learning data analytic model or people simply called it “AI,” it can primarily reduce the false positive alerts, and extract a better insight for the AML officer. AI is useful in identifying anomaly patterns, those intricate and highly organized crime cases can now be easily picked up and escalated for an in-depth follow-up. And the rest of the events are being handled by the Robotic Process Automation. This intelligent systemic workflow helps to streamline the end to end process and improve the data quality control.

Digital onboarding and simplified due diligence

‘When God closes a door, He opens a window.’ For example, many traditional people including elderly started online shopping recently and learning very fast. We should be prepared as the traditional customer behavior had been dramatically transformed to digital by the pandemic. Those in-person banking and some other traditional financial services become difficult in the current situation. However, banks had been embraced Regtech earlier, such as the remote account opening services should benefit and attracted new clients from this ‘window’. Usually, there are two stages: firstly, authenticating the genuineness of the identity documents and then confirming that the person holding the ID is indeed the customer. With the help of AI and facial recognition technology, the system can perform an accurate assessment for each online applicant and escalate those required additional verifications. The same problem with the commercial clients as many company’s staff is still WFH, or because of the travel restriction, the bank cannot conduct the required comprehensive customer due diligence on-site for all the clients. Electronic KYC (eKYC) is another Regtech transformation with a remote, paperless process that minimizes the costs and traditional bureaucracy necessary in KYC processes. Streamline and simplify the due diligence with a systemic risk-based approach. Regtech was not only resolved the problem of anti-infection measures during the pandemic. In the long run, it created the new business channels with significant opportunities align to the future generation.

Regulatory Reporting and CyberSecurity

Looking at the future, there seems to be substantial uncertainty and risk across the global business environment. Additionally, the regulators should be keeping a close eye to ensure financial stability. Banks will have to fight the battle on the front line while capable of managing the highly volatile risk while supporting the increasing demands of regulatory enquiry and fulfilling any new laws or regulatory control requirements. Both risk monitoring and regulatory enquiry will require a faster reporting capability. End-to-end automation of reporting and a well-integrated or centralized reconciliation platform should be the key.

Lastly, don’t forget the importance of Cybersecurity; it has already become a glaring personal and national security issue. Taking the lesson of Zoom Video, it has been outperforming at the beginning of the coronavirus outbreak. Unfortunately, its reputation as well as the market shares, were largely hit due to the lack of cybersecurity. Security flaws were not being handled seriously, and customers also concerns about their data protection. While banks are going through a digital transformation journey with Regtech, it is crucial to adopt security by design from the beginning of the development. Cybercrime and malicious hacking have also intensified, with the advent of digitization and automation of financial systems, the financial crimes have become more electronically sophisticated and impersonal.

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