Death of the spreadsheet: tech changing the face of compliance

Financial institutions are forever balancing the seesaw of economic efficiency and regulatory compliance, so how can cost-cutting strategies be developed, while maintaining robust compliance programmes?

Spreadsheets remain an invaluable resource for businesses because of their ease of use, flexibility and functionality. However, lack of data governance and risk management controls in Excel can prevent compliance officers from comfortably signing off results as accurate.

Financial services have been abuzz with the hype and promise of regulation technology (regtech), with some predicting it could replace current compliance methods and completely kill off the spreadsheet.
Research and Markets says global regtech was worth $4.3 billion in 2018 and predict it will grow to $12.3 billion by 2023.

Juniper Research recently forecast spending on regtech platforms would rise from $18 billion in 2018 to $115 billion by 2023.

Given the high fail rate of digital transformation, 77 per cent according to a recent Gartner survey, combined with some significant regtech failures, such as market surveillance provider Ancoa, which went into administration in 2017, it’s pertinent to question the effectiveness of spending on regtech.

Regtech providers promise to help financial firms strengthen compliance processes, outside trusted spreadsheet use, to reduce their cost, increase efficiency and drive cross-​department collaboration, as well as end-​to-​end visibility.

The use of advanced tools and technologies, such as automation, artificial intelligence (AI) and predictive analytics, can also add business insights, provide better and faster services, and drive new products and services.

Ready for breakthrough

According to KPMG, the industry is not yet there and is only “at base camp”. But it is on the verge of a breakthrough.

“Over the past decade, regtech 2.0 tools helped companies comply with rules, such as know your customer (KYC), and improve supervision,” says KPMG. “The industry is now on the verge of regtech 3.0, as financial institutions start to view risk and regulation as data and prediction problems that technology can address.”

Advanced analytics can bring new insights into regulatory practices, automate complex reporting, analyse compliance risk areas and even create an end-​to-​end view of compliance.

Compliance is still a spreadsheet business, but regtech will kill them off

Matthias Memminger, Bain & Company

But it is easy to get carried away with the hype of these new technologies that ultimately may not deliver on some overhyped promises. Most financial firms’ use of regtech is in its infancy and, despite huge potential benefits, some obstacles lie ahead.

Alex McGill, regtech expert at PA Consulting, says there is one main obstacle inhibiting mass adoption of regtech. “Firms aren’t sure where to start,” he says. Confusion in the marketplace can be amplified by “certain products on offer only solving narrow challenges”. But, encouragingly, providers are starting to collaborate to offer broader propositions, rather than just spot solutions.

Poor risk management around regtech adoption is a potential hurdle, holding some financial firms back. “Those tasked with implementing regtech often fear greater risk to their careers if a project goes wrong than potential reward for getting it right,” says Rupert Bull, chief executive of benchmarking and analytics firm Disruption House. “Incentives and risk management frameworks must change to support decision-​makers and encourage change.”

Positive change

Andrew Berry, director in Deloitte’s analytics team, sees this positive change happening. “We are getting some significant benefits from regtech adoption in anti-​money laundering (AML) and KYC onboarding processes, and with those that combine with manual intervention, for example, sanctions reporting or politically exposed person reporting,” he says.

“There is much hype around tech like AI and robotics replacing processes completely or making them cheaper. But the benefits are more around timeliness – for example, one client speeded up a compliance process from two days to two minutes – accuracy and improving the customer experience to increase customer loyalty.”

If firms only focus on cost and reducing headcount, they could be getting it wrong and missing these wider benefits, says Mr Berry.

“A further example is a bank that is looking at how it can use KYC and AML processes, currently run in duplicated silos, in credit decisions. Regtech can achieve that,” he says.

“Another has automated KYC, but deliberately not reduced staff. Instead, it refocused their time towards generating insights about clients and horizon scanning. The latter can be extremely valuable if you map it with processes, controls and downstream impact, but very few organisations have nailed that yet.

“The best organisations are differentiated by their ability to stitch solutions together.”
So, will regtech ever replace the spreadsheet? “Yes”, says Matthias Memminger, partner at consultants Bain & Company. “Compliance is still a spreadsheet business, but regtech will kill them off.”

Mr Berry disagrees: “Institutions are improving processes, but humans will always be critical to compliance in seeing the issues and in putting customers first. Humans will always rely on spreadsheets, though with a little investment you can make them more efficient.”

Either way, regtech and risk management solutions are set to play an increasingly important role as they become more sophisticated and effective.