How would a second wave of Covid-19 affect the RegTech industry?

There are signs that a second wave of coronavirus cases is on the way. So what will it mean for RegTech companies?

Donald Trump radiated his usual swagger on Thursday February 27. Speaking in front of the attendees of an African American History Month reception in the White House Cabinet Room, the US president commented on the risk of Covid-19 starting to spread in the US. “It’s going to disappear. One day it’s like a miracle, it will disappear,” he said. Only it didn’t.

Almost six months since, the US is still in the midst of the pandemic. And across the world it seems as if countries who have enjoyed a period of slowdown from new cases are starting to experience a second wave.

In Europe, countries like the Ukraine, Spain, Slovenia, Slovakia, Serbia, Romania, Poland, North Macedonia, the Netherlands, Montenegro, Monaco, Moldova, Malta, Luxembourg, Kosovo, Greece, Georgia, France, Denmark, the Czech Republic, Cyprus, Croatia, Bulgaria, Bosnia and Herzegovina, Belgium, and Albania have experienced an uptick in new cases over the past few weeks.

In places like Germany and the UK experts are warning that a second wave, which has yet to manifest, could be waiting in the wings.

A similar pattern has emerged elsewhere around the globe, with nations like Australia, Singapore and Japan also showing signs of a second wave.

The question is what a second wave could mean for the RegTech industry. Some are quick to suggest that it could give businesses in the sector a boost as demand for their infrastructure solutions and services could be about to increase.

“The sector is one of the few undoubted winners from the shift we are experiencing in how we live and work,” says Jonathan McMahon, author of the books Post-Pandemic: 12 Lessons in Crisis Management.

Anthony Quinn, CEO and founder of RegTech100 company Arctic Intelligence, agrees and believes that the a second wave could prove to be an opportunity for the sector. “I think there is a realisation from everyone that Covid-19 is going to be with us until a vaccine is found, so in many ways people we talk to are just getting on with it now and adjusting to fully remote working models, which suits many RegTech providers who offer software-as-a-service platforms which are ideally suited to a distributed workforce,” he tells RegTech Analyst.

Indeed, so far the companies in the sector has faired reasonably well. In fact, investment into the global RegTech sector increased by 5% in the first six months of 2020, compared to the same period last year, according to FinTech Global’s research. In total, the industry raised $3.9bn between January and June this year.

The cybersecurity segment of the industry has fared particularly well. Our weekly roundups of the funding deals always have several cybersecurity startups among them.

Moreover, the digital defence sector raised $1.5bn in the first quarter of 2020, according to FinTech Global’s research. That’s more than a quarter of the $4.7bn raised through the entirety of 2020. That being said, many of those rounds had been in the pipeline before the health crisis broke out.

Cybersecurity companies have been able to leverage the increase of hack attacks that we have seen during the pandemic. With more phishing schemes and ransomware attacks, IT professionals have pushed cybersecurity to the top of their priorities, which has spelt out more businesses for cybersecurity ventures. That being said, the cybersecurity boom could slow down as businesses become more hesitant to spend money the longer the pandemic continues.

Remonda Z. Kirketerp-Møller, founder and CEO, Muinmos, the RegTech100 company, believes the pandemic will create similar patterns going forward. “I anticipate that as we see Covid-19 play out for the rest of 2020, this will only prompt more enquiries from financial institutions towards RegTech companies as they realise that this is a game-changing reality and is likely to alter the course of how their business is conducted beyond this year.

“The good news is that there is the availability of RegTech solutions, like [ours], that could step up to the plate and meet the needs of the financial sector quickly in these times and the faster the financial institutions realise that and with the full attention of global regulators, wide market adoption would certainly happen.

“Already, we are seeing huge amounts of investments devoted by regulators on a global scale to push for RegTech availability and adoption. This might well lead to the regulation of RegTechs at some stage and I think we are seeing the seeds of this being sown today.”

That doesn’t mean that there aren’t risk. For instance, some predictions expect that a second wave is likely to hit around the time when several governments are scheduled to end the emergency measures put in place at the beginning of the pandemic to protect businesses and jobs.

“The vast majority of emergency measures implemented during the initial Covid outbreak where meant to be temporary or one-offs and it is highly unlikely that if another wave were to hit that similar extreme measures would be fully re-enacted, not least because governments budgets have been stretched to breaking point,” argues Tom Rich, financial services consultant at British tech and engineering consultancy firm BJSS. “Companies are going to be expected to be far more adaptable and resilient this time round and should look at what peers worldwide and across sectors have done to help achieve this.

“Even so, it is also imperative that governments and regulators still provide clear and firm guidance to companies to mitigate some of the uncertainty that drags business down. Only a unified effort between companies and governing bodies in a second wave will provide the best chance of turning a V-shaped recession into a W-shaped one.”

While it’s unclear how many RegTech businesses are using the government schemes, the end of them could potentially mean a bigger risk in two ways. Firstly, it could mean that the RegTech businesses who use them could struggle. Secondly, it could also affect some of their customers who, as a consequence could run out of business or may be more reluctant to invest in RegTech companies’ services.

This is a very real risk. A recent survey from Sage shows that 86% of UK SMEs believe a second wave would have a negative impact on their business, with 39% saying the impact would be severe and 15% fearing the would go out of business if a second wave hit.

“A second wave would undoubtedly tip some businesses into failure, especially if it meant further lockdowns and restrictions on movement,” says McMahon. “However, the number of business failures will depend on the severity of any further restrictions. If trading conditions remain broadly the same as today during a second wave, the damage could be contained.”