Firstly, why are we now talking about RegTech?
The focus of the financial sector over the past few years has been on FinTech, applying technology to finance to provide new innovative products and services which meet the needs of an ever-demanding digital savvy customer base. FinTech has seen huge interest and investment - global investment in FinTech companies totalled US$19.1 billion in 2015, with US$13.8 billion invested into VC-backed FinTech companies, a 106 percent jump compared to 2014, and a record year for VC-backed FinTech investment.
FinTech has two rapidly becoming more well known cousins, InsurTech, focused on the digitalisation of the insurance sector, and RegTech, applying technology to assist with compliance.
Over the past year, the number of start-ups in the RegTech space has risen from a just a handful, to over 120, detailed in a list produced and maintained by Jan-Maarten (JM) Mulder, General Partner at Middlegame Ventures. He comments that “RegTech as an interesting investment theme has emerged only in the last year and is now really becoming mainstream”.
A recent report from Deloitte predicts that technology will be a major focus of global regulators in 2017, with KYC compliance, automated regulatory reporting, and communications monitoring to take centre stage.
RegTech has a slightly different value proposition to the financial sector than “traditional” FinTech. Many FinTech initiatives seek to disrupt the financial sector by producing products more desirable to digital consumers, deepening customer intimacy and bringing products, once the reserve of high net-worth customers, to the masses. RegTech, on the other hand, seeks to improve the efficiency and effectiveness at compliance for the financial sector – making RegTech rather more an advantage than a threat for traditional players. This comes at a time when regulation around the world is becoming more and more important for the sector.
This leads us to believe that 2017 is going to be a highly significant year for the development of RegTech as a sector with increasing activity and investor interest.
What is needed to create success?If RegTech is about to become the activity centre of the year, it is only reasonable to ask where will this RegTech revolution take place? Are the conditions for RegTech to thrive the same as those which have helped centres like London, New York, San Francisco, Singapore, Hong Kong, Tel Aviv and so forth rise to fortune in FinTech, or will other new locations come to the centre stage of global RegTech?
To create a successful ecosystem, it is necessary to have, or have access to, the right ingredients for success. These include access to use cases, access to the talent to deliver, the right business environment to support those who will bring the solutions, government and especially regulator support, and of course access – to customers, and other ecosystems.
Financial CentreThe financial sector has a lot to gain from RegTech. The ever-present and increasingly heavy regulatory burden affects all within the financial sector, none more so than in the world’s largest financial centres, where use cases are certain to be found. Traditional players have long struggled with finding the right approach to compliance, whilst trying not to lose agility.
Processes like KYC can be both a highly manual, and therefore costly exercise which add significant time delay before a customer can be fully operational.
Regulatory reporting is often difficult to manage effectively, resulting in many small players using highly manual processes, reporting being performed in Excel. Due to the effort required, reviews tend to be performed periodically, therefore it is difficult to see how an organisation is performing at a particular point in time. Keeping up with the constantly changing regulatory environment can be challenging and costly.
On the other hand, technology offers a wealth of possibilities to add value – being able to get a customer up and running more quickly, and having more accurate AML screening add greatly to efficiency and customer satisfaction.
Strong identity management increases both transaction security and improves the end customer experience.
Automated reporting and risk management tools allow the organisation to see much more clearly where they are with respect to compliance, and avoid mad rush projects at audit time.
An engaged financial centre where actors are willing to contribute use cases, in return for a participation in the end solution, would give a location a head start.
Legal SectorThe legal sector, often overlooked, but very important in compliance management and reporting, is another good source of use cases. Data protection is increasingly important for all actors in the digital economy, where companies must ensure that their measuring meet and continually comply with stronger data protection requirements.
Again, a location with a strong and engaged legal sector who are willing to contribute problems which the RegTech sector will be able to apply leading technology to address, together with an analysis of the suitability of solutions would be a distinct advantage.
Technical TalentOf course, to turn these use cases into something useful it is necessary to have access to a pool of technical talent able to realise innovative solutions. The location must have both its own local pool of technical capability, and the appeal to bring necessary skills in from elsewhere with competencies which are not available in the local talent pool.
AcademiaAs well as being able to produce the technical talent needed to deliver, regulation and compliance can provide a whole domain of research which can be applied to address real industry opportunities. Academic institutions who are focused on applied research and have strong links to the local industry can clearly add an additional piece of value for the location. Longer term, research projects focused on areas like big data analytics, biometrics, and blockchain are of course advantageous, as are research institutions focused on the legal aspects, such as the evolution of data protection requirements.
Business EnvironmentFundamental to success is how easy it is for a start-up to enter the field and be taken seriously. Start-ups are focused on getting up and running, pulling together the right team and arriving at a MVP as quickly as possible.
Key questions surround how difficult it is to get started, what support is available, both from the public and private sectors, and how the environment nurtures small businesses in start-up mode.
FundingNo start-up business in the sector can survive for long without some access to funding. Of course, while some investors operate on a global base, many are focused on providing support for businesses they can actively take part in. These are usually located in their own geographic region.
One needs, therefore, to evaluate the opportunities for both government and private funding including angel investors, VC firms, and other private investors. Once this has been done, should further considerations be focused on what funding access the start-up has as it grows and needs to take its products to an international audience?
Regulator and Government SupportIs the government supporting, or even encouraging of new activities in the sector? Strong governmental support will encourage participation, development of partnerships between industry and start-ups, and help the whole ecosystem to run smoothly.
A government focused on supporting businesses to internationalise will certainly help growth mode companies who want to bring their products to the global stage. One should not overlook the credibility factor - products which come from a strong jurisdiction are often more accepted on the world market than those from less robust locations, even if the quality of the product is the same.
Regulators who are engaged in the process, will, of course, help organisations to create solutions which will enable compliance. Regulators who are aware of the possibilities are better able to design regulations which go beyond the possibilities of today.
“Regulators in Japan, Hong Kong, Singapore, and Australia have been turning their attention to building cyber resilience,” said Deloitte’s report. “This will go beyond protecting core areas of a company's operations and merely reacting to FinTech trends”.
Connectivity and AccessConnectivity can mean many things. Major hubs like London and New York are, of course, well connected with the rest of the world, providing easy access to other markets and to potential customers.
Connectivity goes beyond simple physical connectivity to other cities while enabling global exposure and exchange of ideas. Cooperation is the mode of 21st century business, so businesses must be able to cooperate with potential partners, customers and investors.
Beyond FinanceRight now, RegTech is mostly focused on providing solutions for the financial services sector.
In the future, it is likely that RegTech will also help in other business areas, such as legal and administrative industries, medical and pharmaceutical industries, the insurance industry, amongst others. Any business owner knows that there are compliance issues which must be managed – a technology which can help and take care of the hard work would, of course, be welcome for most.
So where is the best place to create such a hub?In a future article, we will examine in what locations, and in which jurisdictions can the right combination be found, and what initiatives are already starting to take shape to make 2017 the year of RegTech.