Can Regulatory Technology (RegTech) Boost Financial Performance? Evidence From Indian Commercial Banks
This study of Indian commercial banks reveals that while RegTech Enabling Technologies like AI and big data significantly boost profitability, Core Regulatory Technology focused on automated compliance acts as a cost burden with no significant positive impact on financial performance.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the vast, intricate world of banking, money does not move in a vacuum. It flows through a landscape defined by two powerful, often conflicting forces: the relentless drive to innovate and the rigid necessity of following rules. For decades, banks have operated under the assumption that technology is the key to growth, a tool to reach more customers and process loans faster. At the same time, governments and central banks have tightened the reins, demanding that institutions prove they are safe, honest, and free from fraud. This creates a constant tension. Banks must spend enormous amounts of money to satisfy these rules, yet they are expected to remain profitable. The question facing the industry is whether the tools used to satisfy these rules—the digital systems designed to check boxes and monitor transactions—actually help a bank make money, or if they are simply a heavy cost that drags profits down.
A team of researchers at Guru Nanak Dev University in India set out to untangle this knot. They focused on the Indian commercial banking sector, a massive industry that serves as the backbone of the nation's economy. The researchers were interested in a specific type of technology known as Regulatory Technology, or RegTech. This is not a single machine but a broad category of digital tools. To understand the study, one must first distinguish between two very different kinds of technology that banks use. The first kind is what the researchers call "enabling technology." These are the powerful, foundational tools like artificial intelligence, big data analytics, and machine learning. These systems are designed to learn, predict, and find patterns in massive amounts of information. The second kind is "core regulatory technology." These are the specific, automated systems built strictly to follow the law. They handle tasks like checking if a customer is who they say they are, monitoring transactions for suspicious activity, and generating the complex reports required by regulators. While both types of technology are often grouped together under the banner of "digital compliance," the researchers suspected they might behave very differently when it comes to a bank's bottom line.
To find the answer, the researchers did not rely on surveys or interviews. Instead, they went directly to the source: the official annual reports of thirty-two listed commercial banks in India. These reports, spanning a decade from 2016 to 2025, contain thousands of pages of text where bank executives describe their strategies and investments. The researchers used a computer program to read through these documents, searching for specific words and phrases. They counted how often banks mentioned the "enabling" tools versus the "core" compliance tools. By turning these word counts into a measurable index, they created a clear picture of how much each bank was investing in each type of technology. They then compared this data against the banks' financial performance, specifically looking at how efficiently each bank used its assets to generate profit.
The results revealed a sharp and surprising divide. The study found that when banks invested in the foundational, enabling technologies like artificial intelligence and big data, their profitability improved significantly. These tools did more than just help the banks follow the rules; they acted as a force multiplier for the entire business. By using these advanced systems, banks could analyze data more deeply, spot risks earlier, and make better decisions about who to lend money to. This improved efficiency meant that the banks could generate more profit from the same amount of money they held. The data showed a strong, positive link between these investments and the banks' success.
However, the story was completely different for the core regulatory technology. The study found that investing in the specific systems designed solely for automated compliance did not lead to higher profits. In fact, for the largest banks in the sample, these investments appeared to actually reduce their returns. The researchers concluded that these systems function primarily as a necessary cost of doing business. They are the digital equivalent of a seatbelt or a fire extinguisher: essential for safety and required by law, but they do not help the car go faster or the building generate more revenue. For large institutions, the sheer cost of building and maintaining these complex, mandatory compliance systems acted as a drag on their overall financial performance.
The study also uncovered that these effects were not felt equally across the industry. The financial benefits of the enabling technologies were heavily concentrated among the largest banks and those in the private sector. These institutions had the scale and the resources to fully integrate these powerful tools into their daily operations, turning data into a competitive advantage. Smaller banks and public sector institutions, often burdened by older systems and bureaucratic hurdles, struggled to see the same returns. The researchers noted that for these smaller players, the cost of the mandatory compliance systems was particularly heavy, compressing their ability to earn a profit.
Ultimately, the research suggests that the path to financial success in the modern banking era is not about buying more compliance software. It is about building a smarter, more flexible digital foundation. The study indicates that banks must treat their regulatory technology investments as two separate strategies. They must accept that the systems required to follow the law are a cost that must be managed carefully, perhaps by sharing the burden or simplifying the architecture. At the same time, they should aggressively invest in the broader, enabling technologies that can transform their entire operation. By using artificial intelligence and big data to solve problems beyond just compliance, banks can turn the pressure of regulation into an opportunity for growth, ensuring that the cost of safety does not come at the expense of their future.
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