Is regtech a blessing or a curse for credit unions?
Regtech may be one of the hottest new methods for financial institutions to navigate the compliance burden, but are smaller credit unions getting left behind with this technology’s rise?
A combination of the words regulatory and technology, regtech is a burgeoning framework that brings technology to the regulatory monitoring, reporting and compliance space. And some experts suggest it could widen the gap between smaller credit unions and their larger counterparts.
“It could exacerbate that divide, there’s no doubt about that,” said Michael Berman, CEO of the regtech company Ncontracts. “As larger credit unions are able to do more with regtech, we’re also seeing consolidation trends in credit unions as well that we’ve seen with banks and that will definitely make the divide greater.”
Credit unions confront these issues every day, but the question is particularly on the mind this week as industry professionals and bankers from across the financial services spectrum gather in New York for SourceMedia’s RegTech 2019 conference.
Smaller institutions are often the ones that need the most help alleviating regulatory pressures. Data from the Credit Union National Association notes that, as a percentage, smaller credit unions spend more on compliance than their larger counterparts.
Small CUs are “always looking for support,” and that usually comes from third-party providers since many of those institutions lack the resources to hire in-house talent to perform “some of these more complicated and technology-focused jobs,” said Tom Sakash, manager of small credit union initiatives at CUNA.
And that doesn’t even touch on costs. A report from KPMG suggests regtech will make up as much as 34% of financial institutions’ regulatory spending by 2020 for a total of $76 billion, up from the $10.6 billion spent in 2017.
Regtech is commonly associated with anti-money laundering efforts, but experts suggest its uses extend far beyond that. One area that’s quickly evolving relates to cybersecurity laws, which can vary by state. Some have also suggested that advances in regtech could help advance the ball on certain regulatory issues since technology often moves faster than legislation.
Berman said that the period between July 2018 and June 2019 saw more regulatory changes than at any point since the height of rulemaking surrounding the Dodd-Frank Act, and despite many federal efforts toward deregulation, there are still plenty of places financial institutions’ compliance systems can get tripped up.
“I think one misconception when people talk about deregulation is that it’s all change, and someone has to implement changes into the system,” said Berman. “Though it sounds like regulatory relief, it’s still change and that change creates a lot of operational burden.”
And that burden isn’t likely to get any easier. Data from the Filene Research Institute points out that the swift pace of regulatory changes could present a hurdle for CUs looking to make regtech investments, in part because regulators’ technological systems of regulators "often don't interface well with more modern technology."
“The uncertainty around future regulations ultimately limits credit union [regtech] innovation,” Filene added.
Despite its potential, some say the industry hasn’t yet fully integrated an enterprise approach to compliance. Instead, said Nicole Bowen, VP of information, technology, compliance and facilities at Fairfax County FCU, most institutions use regtech for “point solutions,” dealing specifically with one area of compliance rather than an enterprise system that can address compliance at a larger level.
Bowen added that CUs could learn a thing or two from regulators working in this space. Just as banking regulators have banded together in the past to help find AML compliance solutions, so too could credit unions form a working group to support smaller institutions struggling with the intersection of technology and compliance.
“I think we have an opportunity to bring other stakeholders to the table,” Bowen said.