RegTech: Technology-driven compliance and its effects on profitability, operations, and market structure

Ben Charoenwong, Zachary T. Kowaleski, Alan Kwan and Andrew Sutherland

Journal of Financial Economics, 2024, vol. 154, issue C

Abstract: Compliance-driven investments in technology—or “RegTech”—are growing rapidly. To understand the effects on the financial sector, we study firms’ responses to new internal control requirements. Affected firms make significant investments in ERP and hardware. These expenditures then enable complementary investments that are leveraged for noncompliance purposes, leading to modest savings from avoided customer complaints and misconduct. IT budgets rise and profits fall, especially at small firms, and acquisition activity and market concentration increase. Our results illustrate how regulation can directly and indirectly affect technology adoption, which in turn affects noncompliance functions and market structure.

Keywords: RegTech; Fintech; Technology adoption; Financial regulation; Compliance burden; Internal controls; Complementary investments (search for similar items in EconPapers)
JEL-codes: G23 G30 G38 L51 M42 O31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:154:y:2024:i:c:s0304405x24000151

DOI: 10.1016/j.jfineco.2024.103792

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