The RegTech Paradox: Balancing Compliance Costs and Digital Synergies in Indian Banking
This study empirically demonstrates that while RegTech Enabling Technologies like AI and big data significantly boost the profitability of Indian banks, particularly large private institutions, Core Regulatory Technology functions primarily as a costly operational safeguard with no statistically significant positive impact on overall returns.
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
For decades, the banking industry has operated under a dual pressure that often feels like a tug-of-war. On one side, banks must constantly modernize, adopting new digital tools to compete, speed up transactions, and serve customers better. On the other side, they face an ever-growing mountain of rules and regulations designed to keep the financial system safe. These rules require banks to constantly monitor for fraud, verify who their customers are, and report their activities to government supervisors. In the past, handling these rules meant hiring armies of people to check papers and files, a slow and expensive process. Today, banks are turning to technology to solve this problem, hoping that software can do the heavy lifting of compliance. This field, known as regulatory technology, promises to make the rules easier to follow while the bank continues to grow. But a critical question remains: does spending money on these digital systems actually help a bank make more profit, or does it simply become another expensive bill that eats away at their earnings?
Researchers Daljit Singh and Sonia Kundra from Guru Nanak Dev University set out to answer this question by looking closely at the Indian banking sector. They studied thirty-two listed banks over a ten-year period, from 2016 to 2025. To understand what these banks were actually doing, the researchers did not just ask them what they spent money on. Instead, they used a computer program to read through thousands of pages of the banks' official annual reports. The program searched for specific words and phrases, counting how often the banks talked about different types of technology. This allowed the researchers to build a detailed picture of each bank's digital strategy, separating their investments into two distinct categories. The first category included "enabling technologies," which are powerful, flexible tools like artificial intelligence, big data, and machine learning that can be used for many things, from predicting loan risks to improving customer service. The second category included "core regulatory technology," which refers to software built strictly for following rules, such as automated systems for spotting money laundering or generating mandatory reports for the government.
The study uncovered a surprising split in how these two types of technology affect a bank's bottom line. The researchers found that when banks invested in the flexible, enabling technologies, their profitability improved significantly. These tools acted like a force multiplier, helping banks operate more efficiently, make better decisions, and ultimately earn more money on the assets they hold. The data showed that banks using these advanced digital infrastructures saw a clear boost in their returns. However, the story was very different for the core regulatory technology. The research indicated that spending money on software dedicated solely to automated compliance did not lead to higher profits. Instead, these systems appeared to function as a necessary cost of doing business. They were essential for staying legal and avoiding fines, but they did not generate extra revenue. In fact, for the largest banks in the study, the heavy capital required to build and maintain these strict compliance systems actually squeezed their profits, acting as a friction that slowed down their financial performance.
This distinction became even clearer when the researchers looked at different types of banks. The financial benefits of the flexible, enabling technologies were not shared equally; they were heavily concentrated among large banks and those in the private sector. These institutions had the size and resources to fully integrate these complex digital tools into their daily operations, turning them into profit drivers. Smaller banks and state-owned institutions struggled to see the same financial rewards, often because they lacked the scale to absorb the high fixed costs of the technology. Meanwhile, the burden of the strict compliance software fell heavily on the largest banks, where the massive ongoing expenses for these systems actively reduced their asset returns. The researchers confirmed these findings through rigorous testing, including checking if the results held up when they changed the way they measured profit or removed the biggest and smallest banks from the data. They even ran simulations where they shuffled the data randomly to ensure the results were not just a fluke. The pattern remained consistent: flexible digital tools drive profit, while strict compliance tools are a costly necessity.
The implications of these findings suggest a new way for bank leaders to think about their technology budgets. Rather than viewing all digital spending as the same, executives must recognize that the tools used to generate profit are different from the tools used to follow the rules. The study suggests that banks should try to embed their flexible, enabling technologies deeply into their core business operations, such as lending and treasury management, so that the efficiency gains from these tools can help pay for the heavy costs of compliance. For policymakers and regulators, the research highlights a potential paradox. While strict, automated reporting is vital for safety, the high cost of building these systems for every single bank, especially the large ones, can inadvertently hurt the overall efficiency of the banking sector. The findings suggest that regulators might need to consider standardizing these compliance systems or creating shared infrastructure to reduce the financial burden on individual banks, ensuring that the pursuit of safety does not come at the expense of the economy's ability to lend and grow.
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