Rising Tide of Regtech

The financial services sector has long been replete with regulations – and even more so following the global financial crisis of 2008, an event that ushered in a new era across the sector and around the world. Loose monetary and fiscal policies preceding the crisis contributed to a host of problems – from a real estate bubble burst to high levels of personal debt, and vanished life savings to the collapse of long-established financial institutions. The result was a serious erosion of the public’s trust in financiers, bankers and their institutions to self-regulate. To shore up the economy, restore public faith and protect consumers, governments had no choice but to enact legislation.

Simultaneously, new technologies emerged to boost the capabilities, reach and performance of financial services companies. In that time, online banking, investing and payment services became much more prevalent, allowing customers to create and access accounts from any web-enabled devices. While adding greater convenience and improving customer experiences, it also added another potential problem to the financial sector, namely a higher risk factor for fraudulent or illegal activity.

Sweeping advances in technology and the consequences of the financial crisis ultimately incubated innovations that would aid businesses with their regulatory compliance needs. The age of RegTech – a portmanteau of “regulatory technology” – had begun.

Analyzing RegTech

Fast-forward ten years post-financial crisis and RegTech has emerged into its own ecosystem of companies using, developing and producing technologies to help financial services businesses meet their requirements. There are over 600 companies worldwide providing a variety of solutions and services to support other businesses with their compliance needs.

That figure, and other information, comes from a recent report from RegTech Analyst. Part of FinTech Global, the team researches and studies the sector, providing analysis, reports, data and industry intelligence for investors, advisers and businesses across the field. They presented high-level research findings on the global state of RegTech at the recent RegTech Summit in London.

Overall, they’ve noted plenty of growth in the sector and anticipate more for the future. With big investments and growing opportunities, RegTech is proving to be an important partner in the financial services sector and it’s not just the banks that are experiencing benefits.

RegTech Growth

From investments in fraud protection to identify verification, funding across the space has been on an upward trajectory over the past five years. In 2012, just over $300 million were invested in RegTech companies. Five years later, that had more than tripled with just over $1 billion in 2017. Within the first quarter of 2018, half a billion dollars have already been invested, indicating that this could be another banner year for RegTech investment. The recent spate of mergers and acquisitions in the identity space, as well as recent investments by American Express Ventures and others underscore the ascension of value and valuation in this arena.

RegTech is also a growing international business. Of the 600 companies in the space, the bulk of these – 75 percent – are found in just five countries: the U.S., U.K., Switzerland, Australia and Ireland. But the prospects are spreading out as the funding spreads out. Looking at the five-year period between 2012 and 2017, RegTech investments have become more global in nature. In 2012, a bulky 81 percent of investments happened in North America alone. By 2017, European and Asian companies had, respectively, picked up 41 percent of the global RegTech investment circuit.

Know Your RegTech

While there’s a myriad of regulations that impact and define the financial services sector, two sets in particular have far-reaching implications: Anti-Money Laundering (AML) and Know Your Customer (KYC) rules. Both are complex and challenging and financial institutions need to ensure they are compliant; failure to do so is a security risk and a financial hazard with severe fines and penalties for non-compliance.

That’s evidenced by a number of cases worldwide. Most recently, the Commonwealth Bank of Australia – the largest in the country – was forced to pay over $500 million in fees after failing to meet stringent laws against money laundering and financing of terrorism. That follows U.S. Bancorp’s massive $613 million penalty for failures in its anti-money laundering process.

RegTech Analyst’s research found that over half of the companies in the space are engaged in creating and deploying solutions that address or aim to improve AML and KYC workflows. And the money is following – half of the funding investments are supporting companies helping with AML and KYC compliance.

By optimizing technologies such as the cloud, machine learning, artificial intelligence, big data and more, these companies are helping global businesses meet the challenges and demands they face every day. This has implications beyond the banking sector, too. Other regulated and online industries such as gambling/gaming, securities trading, cryptocurrencies and exchanges, eCommerce and more stand to benefit.

Aside from the funding and growth opportunities, RegTech is a smart investment not just for the companies that supply the capital but also for those that buy into the services. For them, it is essentially an investment in improving business operations and processes – including cost savings, efficiency of workflows, fraud prevention, improvements in customer onboarding, AML and KYC compliance and the avoidance of heavy fines and penalties.

Most important of all, it’s about advancing security, building trust and maintaining integrity. The online world can be a battlefield; RegTech is the drone force securing the perimeter. And in that role, it is helping to protect reputations, ensure good corporate governance and improve customer experiences.

Each year, RegTech Analyst compiles the RegTech100, a list of the most innovative companies in the business. It’s a “must-know” of the companies driving and fueling innovative solutions, including identity verification companies like Trulioo. As regulatory sea changes continue to ripple around the world, affecting businesses and organizations of all kinds, RegTech providers are in the best position to arm organizations with comprehensive and agile compliance tools, as well as being powered by their own growth and performance.