There is a growing use of innovative technology for compliance and regulatory purposes by regulators and the entities they supervise, manifesting in the relatively new but rapidly evolving field of ‘regtech’ – or ‘regulatory technology.’
Initial uses of regtech have revolved around use by market participants such as financial institutions, and emerging fintech companies to reduce compliance costs by automating typically manual information gathering and reporting processes. For regulators, regtech is being viewed as potentially improving their efficiencies by not only automating components of their supervisory and regulatory tasks but also significantly enhancing their internal reporting processes. In particular, regtech potentially allows central banks in developing countries to adapt to their expanding oversight scope, a result of rising fintech innovations, especially digital financial services and its positive effect on financial inclusion.
This study looks generally at how regtech is evolving globally and more specifically at how central banks in developing countries are contemplating the use of regtech, the potential use cases, and any impact on financial inclusion. Our research involved desktop research and interviews with central bank officials, providers, donors and consultants involved in global regtech initiatives. We provide examples of regtech use by regulators in India, Mexico, Nigeria, Nepal and Philippines as well as a compendium of the types of technologies that are being used and could be potentially used as regtech. Findings from the research suggest that regtech has the potential to make significant changes to the processes and systems of central banks in developing countries by automating reporting, allowing collection of granular data, providing new flows of information, improving predictive and algorithmic supervision, ensuring proper implementation of constantly evolving rules and integrating internal processes.
The understanding and then adoption of regtech can, however, be challenging in many developing countries that have technology and capacity constraints. In some parts, even though the goal may be to introduce and use regtech solutions, legacy internal processes, lack of policy insights and lack of capacity may in of themselves handicap this goal. In all, this study provides insights into why and how regtech is being investigated by regulators and what solutions are being developed and implemented. It focuses primarily on initiatives related to central banks: outlines the role of the central banks as a user of regtech and presents examples from developed and developing countries. We highlight the potential of regtech to further financial inclusion, and provide some policy solutions and solution iterations that could be employed by regulators in anticipation of implementing regtech solutions, as well as opportunities and challenges.