How is RegTech helping SMEs with their regulatory challenges?
SMEs are often the lifeblood of an economy, and being able to protect against future challenges – whether physical or digital – are always top of mind. In this fight, what role does RegTech play in abating these fears?
One of the biggest transformational shifts of recent years has been the wholesale shift to the digital over simply just the bricks-and-mortar. Many companies, particularly in the financial services space, have left behind the physical altogether and opted to be completely digital-native.
Stacey English, director of regulatory intelligence at Theta Lake, emphasised a similar point – stating the SMEs have seen a transformational shift in how they work, particularly experiencing the productivity benefits of using UCC tools. However, many are also facing growing regulatory attention on whether their business comms are being retained and supervised.
“This year alone, there have been over 50 regulatory enforcements against firms of all sizes for not retaining records and monitoring communications, pushing total fines over the last few years to exceed $4bn,” said English. In tandem with this, regulations are evolving consistently to keep pace with the proliferation of communication modes, which are more complex to capture and supervise than ever before.
English continued, “We’ve seen ongoing guidance, for example, from FINRA on the need to supervise whiteboards, Q&A and polling and the use of generative AI in customer communications, through to the interpretation of emojis as investment advice by the courts.”
In the view of English, the challenge for many SMEs is that their existing compliance tools – built for either email or phone calls – struggle to capture, retain and supervise the integrated, multi-modal communications of modern platforms. Often today, communications will combine text, audio and visual – this brings significant cross-over challenges for firms.
“What’s clear is that the regulatory burden isn’t reducing,” said English. “The good news is that RegTech solutions are built for today’s modern communication environments. Communications are captured in their native format across chat, video, audio and more so entire conversations can be reviewed with full context and content. Archives are unified so firms no longer have siloed data spread across multiple systems that hinders search, retrieval and supervision of communications.
“With the exponential growth in the use and capabilities of UCC tools, RegTech solutions help firms ensure they don’t have coverage gaps in records or oversight. Firms that use DCGA tools are much more likely to be future proofed with coverage wherever staff communicate, including digital whiteboards, workstream or project management tools or social networks like LinkedIn. Many small and medium-sized firms are also benefiting from these modern regtech capabilities built directly into the communication tools they use,” English stated.
The rise of regulations
A growing challenge in the industry right now in rising compliance costs caused by increasingly stringent regulations – something which is even hitting the large firms.
According to RelyComply, whilst considering the hefty fines dealt to firms found guilty of AML wrongdoing, SMEs do not have the luxury of facing the music by chucking a lot of money the regulator’s way.
“Instead, faced with completing mandatory compliance on shoestring budgets and smaller teams, the modern SME compliance office handles a Swiss army knife of trickier data science-centric jobs,” the firm said.
With this considered, RelyComply believes this is why RegTech is proving to be so invaluable, due to its ability to handle a broad range of business cases, from streamlining an institution’s AML process into a singular interface to automating real-time investigations and verifying data with utmost accuracy and timeliness.
“Traditionally, various products would have been used for singular purposes on the AML reporting trail, splitting the data into separate areas. Instead, RegTech curbs this by combining data and systems into one secure platform, simplifying and smoothing the role of compliance officers,” the company stated.
Many RegTech solutions are able to integrate with existing practices, meaning that SMEs don’t need to exhaust money and spend endless hours overhauling with already works for them, RelyComply stated.
“Investing in RegTech now can contribute greatly to safeguarding the data of institutions and their customers from financial criminals in the future, too, as they are far more flexible than previous systems. RegTech does much with fewer mechanisms to achieve AML, even though compliance will likely pose an even stronger stranglehold,” the firm commented.
Christodoulous Mouskos, head of operations at MAP FinTech, outlined a similar point – stating that RegTech is emerging as a powerful tool to help SMEs manage the increasing complex world of regulatory compliance.
“Traditionally, SMEs have struggled to keep up with evolving regulations due to limited resources and expertise. RegTech offers these businesses innovative solutions that simplify compliance processes, reduce costs, and minimise the risk of non-compliance.
“One of the main challenges SMEs face is the cost of compliance, which can be significant both in terms of financial resources and human capital. RegTech tools help by automating regulatory tasks such as reporting, monitoring, and data reconciliation, allowing businesses to focus on their core activities. RegTech is levelling the playing field by offering affordable, scalable solutions that previously may have been out of reach for smaller firms,” said Mouskos.
Beyond this, Mouskos believes that RegTech solutions offer more than simply just cost savings – they also provide SMEs with the flexibility to adapt quickly to new regulations.
“As regulations continue to diverge across jurisdictions, especially in Europe and the UK, SMEs using RegTech can stay compliant without having to overhaul their systems each time a new regulation is introduced,” he exclaimed.
He added, “Moreover, the integration of advanced technologies such as AI for trend analysis and automation of tasks that previously required manual intervention has revolutionized how SMEs approach compliance. Automated reconciliation and real-time monitoring ensure that businesses can not only meet reporting requirements but also quickly address any discrepancies before they become issues.”
Chor Teh, financial crime compliance industry practice lead at Moody’s, also offered a remark that SMEs can often find themselves without both the resources and capacity to cope in today’s evolving regulatory environment.
He said, “In the US for example, the Corporate Transparency Act requires many companies to file beneficial ownership reports to specific data requirements. However, this regulation currently does not apply to companies with more than 20 full-time employees, over $5 million in gross sales, and a physical operating presence in the country.”
Faced with rising complex compliance requirements, Teh stated that RegTech has become essential for smaller companies to manage growing workloads. Raising the Corporate Transparency Act, he claimed that KYB solutions can help SMEs understand who they are doing business with, including beneficial owners. “Automated verification tools, as well as business ownership identification, and ongoing monitoring capabilities, help detect suspicious activity and alleviate reporting requirements for SMEs,” he remarked.
Likewise, Anna Shute, product manager at Qkvin noted, “SMEs are required to implement protocols to both their products and employees. Keeping track of relevant regulations and updates can be difficult as the number of regulations impacting the company are expansive. From company to product and customer regulations. This includes GDPR protecting Personally Identifiable Information (PII) and multiple employment laws each with numerous updates to individual acts/regulations as well as following Consumer Duty and industry-specific regulations.
As the volume and complexity of such regulations increase, many SMEs are having to do more with the same amount of resources, emphasises Donal Lawlor, head of sales at ViClarity.
“This is especially true for firms that sell into different jurisdictions and are responsible for country-by-country individual requirements. For the SME firm, a regtech tool can lighten the burden felt by automating those workflows that are especially burdensome, namely the collection, collation and reporting of regulatory evidence and assurance. Regtech can track obligations across different businesses and jurisdictions, providing confidence that filings or submissions are not missed.”
This automation and streamlining of administrative tasks, he claims, helps to free the compliance office to focus on higher-value activities, such as the interpretation of regulations and scanning of the regulatory horizon.
Sean Sutton, Taina Technology subject matter expert, also believes that an expanding array of complex regulations is leading to a struggle for SMEs to maintain compliance.
He explains, “Internal Subject Matter Experts at these firms tend to support many back, middle, and front office functions and often lack the bandwidth to manually manage growing compliance demands; they face the challenge of ensuring their firm remains compliant, while juggling other advisory tasks. RegTech has become a vital tool in easing the regulatory workload for SMEs.”
Sutton detailed that RegTech solutions – many of which now leverage AI and machine learning – provide automated processes that streamline functions such as tax reporting, customer onboarding, and risk assessment.
“These solutions offer SMEs real-time access to regulatory updates and advanced analytics, allowing them to quickly adapt to changing rules including components to address FATCA and CRS in the tax reporting space. Automated systems enable the seamless handling of large data volumes, ensuring accuracy in reporting while minimizing human errors from manual processing or reviews.
“This reduces the likelihood of penalties for non-compliance and ensures faster, more efficient processes. By freeing SMEs from repetitive tasks, RegTech tools also enable them to focus on strategic activities, helping smaller firms meet their goals,” Sutton stated.
These solutions are helping to level the playing field, Sutton made clear and are offering small firms the same ‘cutting-edge’ compliance tools that larger enterprises are able to use.
“The integration of RegTech allows SMEs to enhance their service offerings, reduce operational costs, and build trust with their firm’s clients through consistent, reliable compliance support. In this way, RegTech empowers SMEs to manage regulatory challenges more effectively while driving efficiency and growth for their firms,” he said.
Likewise, Joseph Ibitola, growth manager at Flagright, stated, “The regulatory burden on SMEs is no small mountain to climb. With compliance frameworks expanding faster than ever, especially in industries like finance and fintech, many SMEs find themselves overwhelmed. They’re expected to meet the same stringent regulations as the big players but without the same resources or manpower.
“By automating labour-intensive processes like KYC checks, transaction monitoring, and ongoing risk assessments, SMEs can ensure they meet regulations without breaking their backs (or their budgets). And it’s not a one-size-fits-all model. RegTech solutions are scalable, meaning they can grow alongside the business, making sure that as regulations evolve, the system evolves with them,”
This is something Ibitola refers to as a double-edged sword. On one side, compliance is being handled effectively, freeing up valuable time. On the other side, it is giving SMEs the confidence to expand, knowing they won’t stumble over regulatory pitfalls along the way.
“This shift allows SMEs to focus on what they do best—innovating and growing—rather than drowning in paperwork. At Flagright, we’ve seen how RegTech transforms compliance from a checkbox into a strategic advantage, giving smaller players a fighting chance in an increasingly regulated world,” he finished.
One of the key appeals for many in the financial industry is that RegTech helps SMEs address their regulatory challenges with scalable and cost-effective solutions. SMEs often lack the deeper resources for large compliance teams.
KYC Portal – a company that offers RegTech solutions that help firms automate their compliance processes – are part of this market. The firm explained that as SMEs grow, their regulatory requirements can become more complex. RegTech solutions are scalable, allowing businesses to expand their operations while still managing compliance efficiently.
“This ensures that compliance processes can adapt to the business’s growth without becoming overly burdensome. Most RegTech solutions come with audit trails and documentation features that make it easier for SMEs to prepare for regulatory audits. Having clear, accessible records helps businesses demonstrate compliance and avoid issues during an inspection.
“By automating tasks, reducing costs, and providing real-time insights, RegTech solutions enable SMEs to focus on growth while meeting regulatory requirements more efficiently,” said KYC Portal.
The profit margin
A huge – if not defining – aspect of being a small business is the profit margin. The bread-and-butter of any company, a healthy or unhealthy profit margin is make-or-break for a business.
Colin Watts, product manager at Wordwatch, said, “A key consideration when discussing regulatory technology for small and medium-sized financial firms is profit margin. In these firms, every cost is passed directly to the customer, who can easily switch to competitors if fees become too high.”
He stated limited operating capital creates two key challenges as regulatory burdens increase. First of all, the access to technology is often expensive, and allocating human resources can strain a small businesses capacity
“Many firms lack dedicated compliance teams, and roles like CCO may be combined with CEO or COO duties. Outsourcing is possible but usually too costly for smaller firms. At the same time, regulations are constantly changing, both domestically and internationally. This makes maintaining compliance a time-consuming challenge for small firms,” said Watts.
While RegTech has grown in use over the last three years, Watts stated, it has mainly been adopted by medium to large firms due to the high costs. Many SMEs can’t afford reliable technology that significantly improves on their existing manual processes, he said.
Watts concluded, ‘To encourage more SMEs to adopt RegTech, we need to address existing and emerging compliance gaps while controlling compliance costs. In the small financial firm market, where speed and innovation are critical, a one-size-fits-all approach won’t work. Firms need the flexibility to manage their risks and make informed decisions that benefit both customers and the broader market.
The importance of AI
Any discussion currently surrounding technology often doesn’t seem complete without raising the spectre of AI. According to Vall Herard, CEO of Saifr, particularly in the financial services sector, AI can help firms more efficiently and effectively meet their regulatory requirements.
But in contrast to large firms, he states, smaller and medium-sized firms are far less likely to have the budget or data to create their own, custom AI models. So, these firms depend on RegTech vendors to supply robust AI tools to help solve their compliance challenges. There are a variety of RegTechs that can help with different parts of the regulatory compliance process.
He explained, “Some RegTechs offer AI that helps firms stay abreast of new regulations as they are passed, summarize the impacts to the firm, and even identify gaps. Others help firms as they create public content to make sure it complies with all applicable regulatory rules. Specially designed large language models (a type of AI) can help firms with regulatory report filing.
“There are also AI applications that help with parts of the compliance process that have grown beyond human-only capabilities due to the sheer volume of data. RegTechs have designed sophisticated AI models that enable 24/7, international screening of adverse media and sanctions for AML/KYC efforts. Another application of AI is for monitoring internal electronic communications at scale. AI is also invaluable for real-time risk analysis and detection within large data sets of securities, investments, and transactions.”
Operational flexibility
Beyond the other benefits aforementioned, Michael Thirer, legal director at Muinmos, raised operational flexibility as another key benefit of RegTech for SMEs.
He said, “RegTech solutions are perfect for SMEs. They give SMEs the capabilities of larger enterprises while allowing them to maintain operational flexibility. During COVID, for example, may investment firms saw a sharp increase in client influx. Those who had RegTech solutions which automated the onboarding process were able to easily scale-up their onboarding without the need for big operational changes. Those who did not – struggled to respond in time to the change.”
He added that RegTechs can also offer SMES expertise in specialised fields – allowing them to rely on know-how that goes into the solution instead of trying to develop this know-how internally. This allows them to better focus on their core mission and competencies.
Tackling silos
According to RegTech firm Ascent, many of the firms it talks to find that regulatory information exists in silos – organised by specific teams with specific uses. This, it claims, has developed over years of solving information challenges tactically, without a more strategic approach to information gathering and sharing.
What does a siloed approach cause? It can often, in the view of Ascent, lead to multiple sources of information, which makes data governance difficult, it also provides information gaps that cause risk and impact control creation. There is also a difficulty in efficiently collaborating across teams and business units.
RegTech, in this regard, can help to drive enterprise efficiency, reduce risk and reduce multiple sources of information and analysis that contribute to information inconsistency, gaps and delays and suboptimal decision making.
The firm added that RegTech can provide holistic information governance, communication effectiveness and optimisation of administrative and pattern-driven tasks – which frees up time to focus on analysis and strategy.
Ascent said, “The scope of topics for a compliance officer within an SME is increasing. They are not necessarily experts in all areas. RegTech allows them to easily collate and track these trends without needing to be an expert in them.”
Like all firms implementing AI, smaller and medium-sized firms will need to develop robust AI governance frameworks, ensure proper staff training, and maintain human oversight and accountability to gain the full benefits from this technology.
