The Tale of RegTech Reaching Maturity

Written on
byJames Gallagher

RegTech is older than you may think. It started in the 1990’s as firms started to apply new technologies such as computer programs to analyse risk. It then moved just before 2010 into “know your customer (KYC)” solutions. Now in the decade of 2020 with the dawn of AI, IoT, ML and Blockchain KYC has blossomed into KYD “know your data”. Like all great tales the journey of RegTech involves a cycle of challenge and renewal to develop into the hero for vulnerable customers it is today.





What was regulation viewed as?

Regulation has typically been viewed as a pencil pushing exercise that’s about ticking boxes so firms and other stakeholders are comfortable to do business with banks. This was due to the repeated collapse of banks from the lack of information that encouraged them to benefit from lack of transparency taking more risky loans to drive higher profits. Foreseeably this does not work in the long run – even one bad year of harvest meant many lenders were not able to pay back.


Why had it developed into this?

Historically, the banking industry has been dominated by the landed gentry so that for hundreds of years regulation was pitted against their profits and only implemented after great crashes such as the South Sea Bubble of 1720. The turn for banking regulation came in 1879 when the Companies Act began to regard banks as different entities than corporate firms, allowing for a limited liability. This was as a means of stability encouraged by The Economist after the failure of the City of Glasgow Bank.





What has changed?

Just as before it was further collapses and failure that destabilised the economy and led to an outcry for regulation. This was brought into sharp focus twice in the last 20 years following  the accounting scandals at the turn of the millennium and the financial crisis of 2007-08. These events brought the two regulations in the U.S. of Sarbanes-Oxley and Dodd Frank. Here in Europe we introduced regulations such as the European Market Infrastructure Regulation (EMIR) and Market Abuse Regulation (MAR).

In the following years, these acts cost huge amounts of money for the financial industry. Between 2010-2016 the Dodd Frank regulations cost the U.S. economy $36 billion and created around 73 million paperwork hours. In 2014 the E.U. Commission estimated that between €512-732 million was spent on one off compliance costs with further costs over the coming years.

What else changed? Technology This has meant individuals see an opportunity to use AI, Blockchain, IoT and other fields to rewrite the financial industry. In 2014 the FCA released Project Innovate: Call For Input which opened their doors to encourage collaboration between innovation in finance with innovation in regulation to keep up with developments and better serve customers. The FCA even proposed starting an Incubator and Innovation Hub to drive this market change.


What is being done right now?

Today there’s a wealth of RegTech solutions firms can leverage to not only ensure they’re compliant with regulation but achieve it in a financially viable way.  Here are a few examples:

  • Blinking is a Serbian company that offers onboarding solutions with digital identification using biometric data and blockchain technology for document management. In other words, they provide an ID to keep customer data safe and help firms tackle money laundering activities by the verified accounts.
  • Fenergo is an Irish company that offers customer lifecycle management for some of the largest industry names. This management integrates all the stages a customer will go through so as to make their experience seamless.
  • Aveni is a Scottish firm that offers NLP and AI technology solutions to transcribe, embed and analyse conversational data to help improve call agent performance, vulnerable customer identification and KYC solutions.





Is Regtech really growing?

The UK alone has 230 RegTech companies with even more global companies that have offices here and employ 68,000 UK citizens. This was highlighted in a report published by the City of London Corporation, which had 164 respondents. Of the respondents, 60.2% of RegTech firms expected sales to grow strongly (>10%) in 2021. For the year previous 65.2% said sales grew with 39.3% saying that sales grew strongly (>10%). Finally only 3.6% said that their sales had shrunk.

Analysts project that globally Regtech will grow from a $6.3 billion to a $16.0 billion industry over 5 years till 2025. That is a 20.3% CAGR. Doubtlessly this is a rising industry especially with smaller firms who could avoid regulation previously and Asian Pacific firms that are entering into a globalised developed world. Therefore, there is plenty of evidence and thought that the RegTech industry is growing and not just in one direction but in multiple. The City of London report highlighted three different sections within the RegTech sector, those being; financial crime, regulatory and compliance management, and regulatory reporting. Further we hear from one particular interviewee their dismay that RegTech was pinned as a subsector of FinTech although solutions “can be utilised in a range of non-financial contexts, including in the oil & gas and telecommunications industries”.


What are the limitations to RegTech growth?

The trepidation of RegTech firms is through the difficulties in adoption to the technology, as mentioned above many service firms both financial and non-financial do not realise that regulation solutions are transferable. From the City of London report 73.7% of RegTech respondents say that long procurement cycles in buying organisations is a problem for the future. This represents the most widely accepted struggle. The second most recognised difficulty at 67.1% recognition is lack of buyer education/awareness around available solutions. These two metrics highlight some of the difficulty that young RegTech start-ups find it challenging to deal with the slow processes of larger service firms. And on the flip side, that these financial service and non-financial service firms are not aware of the benefits that this newly maturing industry can bring in compliance with regulatory requirements.


Why is RegTech important?

Although 26.4% of RegTechs say that Covid 19 has been a major hindrance to adoption, 85.1% believe that the problems presented as a result of Covid 19 can be addressed by RegTech. With an increase in vulnerable customers due to Covid 19, the mass movement of customers onto digital platforms and the closure of bank branches with other high street physical premises technology has an important role to play.

Regulation originally was set in place as best practise for the running of a firm and treatment of customers. In recent times after financial crises and encouragement to the welfare, especially of the vulnerable, customers have meant increased regulations and higher scrupulosity in meeting those regulations. New innovative firms are engineering how we can adopt technology to meet these regulations so that they do what regulation was always meant to do – make doing business better.


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