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Nordigen: Regtech – What’s Open Banking Got To Do With It?

Regtech has enjoyed an extraordinary rise to prominence, becoming the bread and butter of companies looking to comply with the full extent of the law. And now, its third regeneration is being powered by open banking technology. 

Rolands Mesters is the co-founder and CEO of Nordigen
Rolands Mesters

Here in this guest-authored article for The Fintech Times, Rolands Mesters discusses the rise of regtech and how open banking is helping compliance technology stretch its wings into a new era.

Mesters is the co-founder and CEO of Nordigen, a Latvian account data analytics provider that assists banks, lenders and fintechs in leveraging open banking. With industry knowledge and first-hand experience with open banking, here Mesters analyses how open banking is powering a new, more powerful generation of regtech.

Outside of the scope of finance industry professionals, regtech is unlikely to be a commonly used term. Despite this, the practice itself is imperative to the financial industry, implemented for the successful and safe running of processes and maintaining the protection of businesses and consumers.

Short for regulation technology, regtech refers to a community of tech firms that create solutions to assist companies in complying with regulatory requirements in cost-efficient ways through automation. These solutions are created through the use of cloud computing, along with findings procured through big data collection and analysis.

The rise of regtech

The main goals of regtech are to facilitate financial companies’ compliance with the myriad of ever-evolving regulations.

Staying on top of the full set of rules that companies within finance need to follow can be difficult, especially when their offices span across multiple countries and therefore have to comply with all local requirements. Compliance, in this case, can be expensive, time and resource-intensive, necessitating a more automated solution that underpins regtech.

Common use cases for regulation technology include the finance sector, cryptocurrency platforms and iGaming websites. It is now viewed as one of the fastest-growing phenomena in the fintech world.

While regtech seems like a new addition, a version of regulation technology has actually been around since the 1990s, when institutions started to introduce new ways to stay on top of regulation monitoring and risk analysis. This variation became known as regtech 1.0 and was followed by regtech 2.0 in the 2000s when financial regulation software became more focused on processes relating to know your customer (KYC).

KYC refers to a series of operational procedures performed by institutions to verify the validity of client information during the onboarding process.

The financial crisis of 2008 highlighted the necessity for regtech even more. Following the crisis, financial reforms were implemented to ensure that banks and financial institutions maintained high-risk management standards.

As a result of these regulatory reforms, a vast number of new laws and regulations have been enacted, expanding the purview and complexity of the regulatory domain. In the more recent years, technological advancements and new digital standards have further propelled regtech and established it as a necessity for companies wishing to stay compliant efficiently.

The use of outdated systems, such as old anti-money laundering (AML) solutions, can lead to institutions losing money when they could be instead benefiting from AI-powered analysis and big data. It is therefore essential that banks and other financial firms turn to modern means to keep on top of their processes to ensure regulatory compliance in a way that guarantees cost-effectiveness, as well as efficiency.

The rise of financial crime and the need for enhanced cybersecurity practices have signified the need for regtech as well.

Regtech solutions in the financial crime arena operate using sophisticated big data analysis, going through vast amounts of data and connecting seemingly unrelated data points to gain a more complete regulatory insight. Access to this data is achieved through open banking, connecting directly to the bank to facilitate real-time transaction monitoring and client risk assessments.

A new era of regtech, powered by open banking

The financial industry is on the cusp of the next era. Regtech 3.0 shifts the focus from ‘know your customer’ to ‘know your data’ – financial institutions using technology and data analysis to highlight and forecast risks through prediction algorithms.

The emergence of payments services directive two (PSD2) has enabled approved third-party services such as regtech firms to gain access to key account data and payment systems, with consumer approval.

Regtech providers are eager to capitalise on the potential presented by open banking in order to broaden the scope of their goods and services and utilise fintech’s existing customer bases to collect more data and expand their offerings.

Open banking, established as a result of PSD2, provides a regulator-approved way of acquiring financial data directly from accounts. For example, this can be used to perform AML and KYC checks, when pinpointing a client’s source of funds, which can be easily extrapolated from their bank account history.

Data sourced through open banking significantly increases the amount of data available to regtech to analyse, ensuring greater accuracy and comprehensiveness. Data can be gathered and analysed in real-time using automation processes, machine learning and algorithms. The process is significantly faster and does not rely on manual input or a large amount of employee resources, and is, therefore, less susceptible to human error.

Open banking enables regtech to gain data where they otherwise wouldn’t be able to do so through other means, such as lending. There are millions of people across Europe who are ‘credit invisible’, essentially having little to no credit history.

Open banking data is sourced directly from customer bank accounts, not outdated financial history stored by credit bureaus. Regtech tapping into open banking technology allows them to more accurately determine risks by analysing a much greater amount of data and a larger amount of customer profiles.


  • Tyler is a fintech journalist with specific interests in online banking and emerging AI technologies. He began his career writing with a plethora of national and international publications.

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