The appetite for regulatory innovation is growing
Ahead of RegTech Rising in London this December, FinTech Futures spoke with Frederic Krahforst, CEO at hawk:AI, about what they do and where they think the opportunities lie for other’s looking to join the regtech space.
What is the key business problem Hawk:AI is designed to solve?
At hawk:AI, we are building the world’s most powerful financial crime detection platform to allow the financial industry and officials to join forces. To financial institutions, we provide an ai-enhanced end-to-end real-time transaction monitoring and investigation solution to run their compliance efforts 10 times more efficiently and effectively.
How did you get the idea?
When you look at the stats of global money laundering, you’ll quickly realize that our system to fight financial crime is fundamentally broken. Globally, our society loses up to US$ 3.8 trillion every year on money laundering, and while institutions spend hundreds of billions to fix this problem, they only catch less than 1% of offenders.
This problem is so unbelievably large that we thought it deserves more innovation attention – because when you actually look at the systems that are out there, you realise that innovative approaches are hard to find. Much of the screening and reporting of transactions is still a very manual process unfit for the growing requirements. Also given the inherent nature of our connected global monetary system, the problem lends itself to a machine learning and ai-enhanced solution. So we felt very comfortable saying that we can fix at least part of this problem with our technology and machine learning expertise.
The more we learn from compliance experts and regulators in the industry, the more we realize that they have been waiting for innovators to tackle this problem, as the AML industry has been historically overlooked by innovators and this creates a great momentum for our team.
What technology do you use to make this a reality/ deliver your idea?
We deploy powerful, proven tools that are already deployed successfully in other industries. Essentially, we developed a highly scalable microservice architecture that allows us to perform our tasks more reliably and at a fraction of the cost of classical systems. We think that financial institutions should no longer have to maintain their own systems, but be able to rely on a service that is always up to date to the newest regulatory requirements and technological developments. We also think that large integration projects no longer work for banks as costs, effort and failure rates are too high given the complex nature of their tech ecosystems. As such, we designed our service to be able to interact securely and reliably with any system that the bank wants to use as the corresponding one via a clean API.
Lastly, we provide a very clean and intuitive case management front end. Existing systems are often very user unfriendly, making work often a very frustrating experience that also increases likelihood of error. Therefore, we focus a great amount of our time to produce the smartest and most intuitive user interface that increases processing time by automatically selecting and pre-summarizing only the relevant information for each case.
What trends do you think are driving the regtech industry right now?
It seems like corporates, investors and innovators have taken some time to start tackling the backoffice part of the value chain. Possibly naturally, at the beginning of the digitalization of financial services, everyone was focused on the immediate B2C revenue drivers and the more tangible improvements like customer experience. In addition, very homogeneous tech landscapes at banks might have made it easier to start at the consumer end point, while investments in the front part of your value chain appear less risky and often promise a shorter pay back period, which may be viewed favourable in a cost conscious, consolidating industry. On the other hand, operational topics tend to be of higher risk and have longer pay back periods. This may explain the delayed development of the regtech space when compared for example with the fintech space.
However, the appetite for operational innovation, including regulatory topics, has recently quickly accelerated. I think financial institutions came to realize that this will be one of their key fields of competition with challenger banks, who have started to grow to significant size quickly. Also, investors seem to have gained the conviction that it is possible to build a highly scalable business selling into financial institutions, given the emergence of mid-layer providers and the increasing adoption of API and cloud integration at banks.
In summary, we now observe a very attractive client and funding environment for regtech innovation and trust that this trend will accelerate further in the coming years.
What advice do you have to other start-ups looking to enter the regtech space?
I am convinced that the regtech space remains an attractive market for innovators starting out in the coming 1-2 years as competition is not yet as intense as in other areas.
From our experience, we can only recommend to get involved with your potential clients (note plural) as early as possible to fully understand the needs and particularities of your industry. A lot of problems have an easy solution on paper, but the actual challenge often is to find a scalable solution that solves all of the most important diverging problems for your target group. In addition, you need to realize quickly what your minimum required feature set is to become relevant. If there is one thing financial institutions want to avoid, it is adding another tool. I.e. if your application is too narrow you may run the risk of not being considered by your target group despite providing the market leading solution for a particular problem.
Other factors that appear a lot more important early on in regtech are building trust via advisors and exhibiting a very high standard of security. The famous mantra “fail fast and break things” may result in a short-lived trip into regtech.