The emergence of regtech as a catalyst for innovation

When I first heard someone use the term regtech (regulation technology) about a year ago, I had some pretty strong feelings about it. I didn’t appreciate the thought of further fragmentation of the fintech industry, as it impacts collective innovation and cross-fintech solutions. I also felt regtech as a separate space would struggle to create its own identity and brand, competing with the through-and-through coolness of the fintech parent.

One year on and, no, I haven’t changed my mind on those worries, but I’ve seen regtech emerge as one of the key areas of innovation in the past few months, inviting a huge amount of interest from regulators, central banks, corporate banks and traditional risk and regulatory firms. My recent interview with Ruth Wandhöfer from Citibank talked about how regulators are increasingly getting involved with topics of innovation, and how some parts of the world are utilizing regulatory structures and bodies to create high-velocity innovation (for example, Singapore). Ron Shevlin recently spoke about ways of easing compliance in a Breaking Banks podcast.

There are three factors that I believe have helped regtech emerge in its own right:

Making regulations and compliance easier is one of the biggest immediate challenges banks and corporates face today. Although they aspire to offer the world’s best user experience to their customers, sometimes compliance and reporting actually get in the way of offering that desired customer experience. If there’s any technology out there that can help them take care of this pesky issue first, isn’t that what should be invested in first?
The regtech industry has only one primary selling channel to worry about: banks and investment firms. Plus, technology built specifically to ease banks’ regulatory burdens is a huge market in itself, and the B2B market is a much easier market in which to find growth compared to the large consumer markets fintech startups have traditionally targeted with payments, crowdfunding, lending and investment management.
Every bank in the world wants to find a better way to handle KYC.

When we realize how closely banks and fintech firms are partnering with each other, and how they’re not each other’s biggest enemy (as mentioned in my previous post), we begin to see how lucrative this market is proving to be for some of the fintech startups coming up globally.

However, the best view of what startups are doing in the space came from one of the events I was invited to recently: the 3D FinTech Challenge, an accelerator program run by Dassault Systemes and Deutsche Boerse, focused entirely on regtech.

Quotes from regtech startup founders

I asked the startup founders at the event how they ended up in the regtech space:

Tim Sadler (CheckRecipient): “We think there’s still a huge amount of low-hanging fruit in terms of what corporations can be doing to protect their data, and recent advancements in technology and data science present a huge amount of opportunities for startups operating in this space.”

Elie Abi-Lahoud (Quarule): “Regtech has the potential to address challenges around making sense of regulations, understanding how they apply to the business, assessing regulatory rules over trade/account/reference data, analyzing compliance state, and understanding what-if situations. Soon, this technology will be seen as a must-have instead of a ‘nice to have’.”

Anthony Pereira (Percentile): “In the immediate post-crisis years, it became very evident that the world of risk management needed to move on from just ticking boxes and reporting numbers, to actually trying to understand risks and having the ability to address them. This means more automation and fewer manual processes. Better governance and faster compliance are just two of the many benefits that lead to improved regulatory and investor confidence.”

Ariel Attias (Athena Portfolio Solutions): “After paying more than $235bn in fines and compensation since the credit crunch, and filling buildings with compliance officers, investment banks understand that they won’t be able to continue carrying the huge amount of compliance costs on their balance sheets. Today, everybody is asking how we can mitigate the conduct risk, and how we can reduce compliance manpower. The answer is clearly regtech.”

Donald Gillies (Passfort): “We’re in the regtech space because firms large and small have massively underinvested in technological solutions to regulatory problems over previous decades, meaning there’s an incredible opportunity to innovate here. This chronic underinvestment manifests itself in spiraling compliance costs and is compounded by the increasing quantity and complexity of regulations being introduced by regulators globally. Technology has redefined the economic parameters of so many different industries in recent years and we think it’s about time these efficiency gains were realized by compliance teams.”

What the regtech startups are up to

AlgoDynamix, winner of the challenge, offers a unique technology to combat trade fraud, helping the customer trace any suspicious or irregular activity during large market or financial instrument shifts (for example, the selling of a stock just before an announcement in M&A activity).

Following the 3D FinTech Challenge, I did an analysis on other regtech firms around the world to see if there are common problems they’re working on, and whether any major monetary investment has been made in any of these problem areas.

A selection of regtech (regulation technology) startups. Image: Devie Mohan

(Click image for larger version.)

There are scores of other firms, not on the list, innovating around data and machine learning, even directly contributing to KYC challenges. Although there has been very little investment beyond seed funding in these startups, there is clearly interest from several banks and corporates to work with them to find targeted solutions.

Other great news is that London is emerging as the clear hub for regtech, beating Silicon Valley hands down. It’s definitely an interesting area to watch out for in the coming year.