APIs and the Future of Digital Compliance

We live in a digital age where the scope of technology now at our disposal would have been too unfathomable for most people to comprehend just 20 years ago. In parallel to this rapidly unfurling technological revolution, people have become more demanding; everything must be available on-demand and delivered as seamlessly as possible.

We can see these rapid developments in the advent of self-driving cars, Amazon’s transition from bookseller to global superpower, the sudden ubiquity of FinTech, and in the way more and more of our daily interactions are being streamlined and digitalised.

Expectations on the speed of interactions and service levels are higher than ever before, but in industries where regulations and compliance are stubborn and necessary roadblocks on the highway of right now, adapting and streamlining business methods and protocols is a complex endeavour. This is particularly true for the financial industry, where the implications of the global financial crisis have led to an increase in the laws and regulations imposed by governments and financial regulators in the last decade.

Of course, regulatory watchdogs play a key and necessary role. The problem for finance professionals is that as new and updated regulations are applied to keep up with the rapidly changing times, knowing exactly which service can be offered and under what circumstances is essentially a full-time job in itself.

In a recently released report, LexisNexis Risk Solutions estimated that global financial services companies spent $180.9 billion on financial compliance in 2020. In spite of so much time and money being dedicated to compliance, a further $10.4 billion was levied in fines and penalties in 2020.

The API solution

APIs play a critical role in the rapid information age in which we live today. From checking the weather to making a hotel booking, APIs play some part in the processing of almost all online requests. APIs are so significant that they could be considered the glue that is holding together the very structure of today’s interconnected digital society.

In the world of financial compliance, where many people still rely on phone calls, emails, or a database search to find a particular piece of crucial information, the introduction of APIs to this process has the potential to revolutionise the entire system. By introducing an API, the need to manually search out critical regulatory information is replaced by the opportunity to access that same information instantly by simply inputting the raw data most pertinent to a specific query.

APIs have already been adopted on a large scale in the financial industry thanks to the rise of open banking and the inexorable shift to digitalisation, but until now their uptake has been relatively less widespread when it comes to compliance. It is perhaps the sheer vastness and complexity of this field that has held back widespread adoption, plus the fact that in compliance, the margin of error that can be allowed in other fields is simply non-existent.

The introduction of APIs into the financial compliance sector is being led by companies specialising in what is known as RegTech (Regulatory Technology). Still a somewhat fledgeling industry, we can track the financial services providers’ growing appetite for RegTech and the introduction of APIs into the world of compliance in the figures that show how investment in RegTech has jumped from $1 billion in 2015 to $8.5 billion in 2019.

RegTech and Cross Border Compliance

The scope and size of regulatory compliance in domestic financial transactions is vast. When approached from a cross-border perspective, the totality of all the rules and regulations that must be applied domestically are potentially at play simultaneously in cross-border interactions. The sheer number of cross-border and product suitability rules is enormous, but this also makes this field an ideal one for the introduction of RegTech and APIs.

Financial companies that are not fully prepared to manage cross-border compliance face regulatory and financial risks if cross-border and product suitability rules are not closely followed. Adhering to these stringent rules is both time-consuming and expensive from an operational perspective.