How RegTech is Transforming Compliance in the Financial Sector

In a recent analysis, McKinsey & Company outlines how regulatory technology (RegTech) has become a critical tool for financial institutions navigating increasingly complex compliance landscapes. The 2008 financial crisis triggered sweeping reforms, such as the Dodd–Frank Act in the US and Basel III internationally, that have imposed heightened oversight and operational demands. With banks paying $19.3 billion in penalties in 2024 alone, the need for more efficient compliance mechanisms has intensified.

RegTech emerged alongside advancements in AI, machine learning, cloud computing, and biometrics, offering solutions that automate compliance monitoring, risk management, and regulatory reporting. 

McKinsey identifies four primary categories: financial risk and capital management, governance/risk/compliance, cyber and IT security, and financial crime prevention. These tools help institutions meet cross-jurisdictional regulatory obligations, close cybersecurity gaps, and detect suspicious transactions with greater accuracy.

Market growth is being driven by the complexity of regulations, rising fines, higher regulatory expectations, and the shift toward digital and cloud-based infrastructures. McKinsey projects RegTech spending to grow by up to 14% annually through 2028, with financial crime and cybersecurity solutions outpacing other segments. While adoption is highest in North America and Europe, emerging markets in the Middle East and Africa may see faster expansion due to low penetration.

For compliance leaders, McKinsey advises monitoring market developments, considering combinations of specialized solutions, and prioritizing data quality before implementation. High-quality data is essential, as even advanced AI tools cannot function effectively with poor inputs.