The RegTech industry is growing massively, but there are still challenges to tackle head-on to keep expanding.
RegTech companies are thriving around the world. Over the past five years, the sector has gone from strength to strength by creating clever innovative solutions to ensure companies comply with rules and regulations. Whether its ensuring banks have sufficient defences against money laundering or that they conform to the new strong customer authentication rules of the EU’s Revised Payment Service Directive (PSD2), RegTech entrepreneurs have proven themselves up to the task and are flourishing as a result.
Over 900 investment deals were closed in the RegTech sector between 2014 and the first six months of 2019, according to FinTech Global’s research. Those deals represented a total influx of almost $13.3bn to ensure entrepreneurs and their teams keep on innovating. And according to Maria Scott, founder and CEO of TAINA Technology, the RegTech startup, it’s not surprising. “Financial institutions are drowning under the burden of regulation,” she recently said in an episode of FinTech Global’s new podcast Women Leaders in Finance. “It’s coming at them from every direction, from every jurisdiction and it’s now becoming even more difficult that regulators have started to legislate across the board.”
The amount of money going into RegTech is seemingly growing. Of the $13.3bn injected in the last five years, close to two-thirds were raised in 2018 and the first six months of 2019. In 2014, was $923.4m was invested in the industry. That figured jumped to $4.48bn in 2018.
“It is going to be massive and the reason [it is going to be] massive [is] because we haven’t even scratched the surface,” Scott said. “Even in the most advanced financial institutions, compliance is still incredibly manual and human intensive.”
For instance, the banking sector is increasingly facing scrutiny for things like tax evasion. This has provided ample opportunities for savvy RegTech entrepreneurs to help them comply. “You know, the latest fine was €3.2bn,” Scott said. “You know, for a single institution that’s massive. So I think the challenges for institutions to be able to comply with these regulations in a robust way whilst trying to save cost whilst trying to keep their shareholders and boards at peace [with] that is incredibly, incredibly hard.”
Scott argued that RegTech can also be a key differentiator for traditional financial institutions facing increased competition from new disruptors. “Now [banks are] also obviously under fire from challenger banks and there is this real battle for superior customer experience,” she said.
Scott also argued that the sector was more sustainable compared to other FinTech sectors “because we are not competing with banks either.” Banks, she was convinced, are here to stay as are RegTech companies.
Still, Scott admitted that there are still challenges to overcome to ensure the continuous growth of the RegTech Sector. For one, she noted that lawmakers can still feel uncomfortable with accepting that “import regulatory decisions [are] made by engines, black boxes [and] they still want it to be based on the rule set.”
While Scott agreed that most decisions should be made by a human, she still believed “AI and machine learning have a huge role to play in facilitating how the information gets in.” In TAINA Technology’s case, the RegTech company is using this sort of technology to read documents.
“And that has been incredibly, incredibly valuable as we managed to take out a load of manual intervention, a lot of human error just by [using] really smart ingestion of data,” Scott said. “So I think anything to do with data, anything to do with ingesting documents, images has a huge role to play. Technology can revolutionize that space.”
To remain relevant RegTech movers and shakers must overcome the challenges of implementing their solutions into companies’ systems. “Some of them are inherent and just objective,” Scott said. “This has all to do with legacy systems, but in all honesty, in every financial institution we have worked with, there’s never been a system that we couldn’t integrate with. And so whilst this challenge is out there, I think it is slightly exaggerated because at the end of the day if you have good partnership at both ends you will make it happen.”
Apart from ensuring the technology fits in with legacy systems, RegTech startups also have to convince people in those firms that it is a risk worth taking. “People just really don’t like change,” Scott said. To overcome this hurdle, Scott advised businesses to speak openly and transparently with the staff members of the companies looking to implement the solutions to help them understand the benefits. “Just accepting and embracing change and risk-taking I think can go a long way in accelerating this adoption,” Scott said.
Looking towards the future, Scott believed the RegTech would see more consolidation “because for financial institutions, particularly for large ones, they don’t want multiple solutions, they want one platform.”
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