Regulatory technology (RegTech), the application of innovative solutions by financial groups in order to achieve regulatory efficiency, experienced major growth against the backdrop of the post 2008 crisis. In 2017, BCG found over 200 regulatory changes occurring per day, either new legislative filings or amendments to existing leading regulations like Basel 2 and 3, Dodd-Frank, MiFID II, Solvency II, and GDPR. And earlier this year, the Economist reported on the dramatic rise in major banks’ core agenda focused on RegTech, as measured by the number of times the word “compliance” was mentioned in their 10K reports (BNP Paribas and Credit Suisse both recorded under 20 times in 2006 and nearly 250 in 2018).
Notwithstanding the prevalence of financial crime, the digital communication revolution has largely served as the impetus for the RegTech boom with cheaper and faster means of communication with customers and employees from the rise of layers like SMS and Email, or encrypted mobile applications like Whatsapp and Telegram. Banks, like any other enterprise, see the value in maximizing all those channels with customers and employees to scale their business. The only caveat is that these new regulations require firms to monitor, track and report data on virtually all communication and business activities, burdening firms to increase their compliance staff and impeding their operational efficiency. Solving this tradeoff is Israeli startup Shield, which has developed an Artificial Intelligence (AI) based software solution to automatically monitor all electronic communication and ensure financial institutions meet full compliance, without impacting operational performance.
Shield, founded in late 2018, developed a data management platform that utilizes machine learning and natural language processing (NLP) algorithms to monitor all communication channels employed in their firm as well as transactions, and understand the data’s context in order to detect and prevent violations.
“We are helping financial firms mitigate risks from electronic communications and comply with regulations” explained Weitzman.
Shield collects unstructured electronic communication data using a pre-integrated data aggregation layer that uses a standardized API to connect to all types of communication platforms, including voice, messaging, and mobile data. During the process, Shield can enrich the data with information from external data sources such as the CRMs, active directories or via APIs to additional organizational systems.
Shield’s proprietary Financial Context Recognition engine (FCR) uses NLP capabilities to extract the financial context out of a conversation recorded in an electronic communication channels, allowing compliance officers to accurately link a record to an executed financial transaction. “The FCR is a huge step towards accurate, automated, trade reconstruction” shared Weitzman.
Their advanced multi-layer correlation analytics engine uses machine learning techniques to leverage the data links and connect interactions throughout the transaction. Shield also uses machine learning to address false positive alerts. The platform collects data on raised alerts by the compliance officer and generates a quality score on the false positive alert, enabling them to allocate their attention to critical alerts. According to Weitzman, today’s false positives rates in financial firms are almost 95% and “just a small improvement translates into significant cost savings, and Shield improves that rate at scale.”
“This is an innovation to a market that’s typically siloed, with financial firms subscribing to individual compliance platforms for each communication medium” explained Weitzman. Shield covers all mediums separately, connecting them to one platform and cutting through the prevailing silo market structure.
For financial institutions, there are many pros to adopting the digital transformation but it comes with risks. Regulators understand the magnitude of risks, as evidenced by fraud, abuse and misconduct coordinated over internal communication channels, like the ‘banana split’ trade by several major banks, for which they were fined for over $1.2 billion. In that particular case, the adverse silo effect of communication data platforms was on display, when the guilty traders created their own lexicon in inconspicuous chat rooms with cover names like ‘Two and A Half Men’, which enabled them to buy and sell on inside information. Each communication channel is monitored by an individual platform vendor, and the ensuing silo effect forces compliance analysts to manage their attention to between numerous data platforms.
“Its forced banks to restructure their operating budgets” explained Weitzman. “Electronic communication compliance is a chunk of the compliance legislation they adhere to, where 20% of operational costs for banks are dedicated to compliance today.”
In a drag and drop method, Shield’s platform can connect to any data source in almost fully automatic onboarding fashion. “We are moving towards a level where Shield becomes fully accountable for automated data acquisition and availability, with minimal intervention” said Weitzman.
Shield has extensive operational experience in compliance and regulation solutions, including MiFID I&II, GDPR, MAR, MIfIR, Dodd Frank and FINRA. They’re working with several tier 1 banks.
The startup has won a number of accolades, including Deloitte’s Regtech startup award from over 200 global regtech startups solving regulatory problems in the financial sector. They’re currently raising their series A funding round to increase their regulatory visibility globally and scale their business. Shield is a bootstrapped startup without any external funding and they total 25 employees.
The global RegTech market size was valued at $2.8 billion in 2018 and is expected to reach $55.3 billion by 2025. At the end of 2018, some 30,000 (or 15%) of Citigroup worked in compliance, risk and other control functions. “The funny thing is most of the compliance work is still done manually” explained Weitzman. “We’re in the business of efficiency. We want to free your employees to do other things and have a meaningful surveillance capability.” Amid all the regulatory uncertainty, Shield is championing full compliance visibility to ensure all banks maintain their operational efficiency.