Nestor Gizrel Ong

Global Regulatory Technology Market to Reach USD7.2B by 2023

A report forecasts the spending on global regulatory technology (RegTech) will reach up to USD7.2B by 2023, growing at a compound annual growth rate (CAGR) of 25.4% from the year 2018 to 2023.

Banks and financial institutions work in a highly regulated environment. They continuously face new regulations to prevent money laundering and restrict terrorist funding. The regulations exist to address concerns over the safety and stability of financial institutions. Banking regulation also originates from microeconomic concerns over the ability of depositors to monitor the risks and the macroeconomic concerns over the stability of the banking system in case of a crisis.

Banks spend huge amounts of money due to fines and penalties for non-compliance. In fact, financial institutions spend more than USD100B every year for non-compliance issues. The tools used to respond to these regulatory changes have been found to be ineffective. They are traditional and outdated and the need for Regulatory Technology software arises. RegTech is expected to simplify the implementation of regulations and majorly impact financial service organizations.

This is where RegTech vendors come in. They develop and offer software to help financial institutions with compliance management, reporting, risk management, and identity management, among others. The revenue for the global regulatory market is expected to reach up to USD7.2B by 2023, from USD2.3B in 2018. Out of all the mentioned solutions, compliance management is expected to grow at the highest CAGR during the period (2018 to 2023).

The solutions help organizations in salient compliance areas and averse risks when dealing with Anti-money Laundering (AML), Know Your Customer (KYC), second Markets in Financial Instruments Directive (MiFID II), Basel III, Revised Payments Services Directive (PSD2), Solvency II, and Alternative Investment Fund Managers Directive (AIFMD).

Governance, Risk, and Compliance (GRC) Vendors

With an increase in data protection needs all over the world, banks and financial institutions see the imperative to strictly conform to laws and compliances and ensure transparency in transactions involving money, as they are constantly monitored by regulatory bodies. Compliance with the rules allow organizations, like banks and other financial institutions, to avoid paying penalties. Many RegTech vendors partner with Governance, Risk, and Compliance (GRC) vendors to enhance their customer reach and effectively connect to their clients in the market.

Governance, Risk, and Compliance management is an up-and-coming field that involves a comprehensive and integrated approach to governance, risks, and compliance to rules set by regulatory bodies. It refers to the rules to the standards and mechanisms used to the aforementioned areas. GRC vendors ensure consistency, efficiency, sustainability, and transparency in the processes that are involved in these areas.

GRC vendors should also have platforms with Software as a Service (SaaS) capabilities and they should offer the following:

1. Content Management
2. Document Management
3. User Event Input/Output, Distribution, and Communication
4. Risk Analytics
5. Risk and Control Management
6. Workflow Management
7. Audit Management
8. Dashboards and Reporting
9. Regulatory Change Management

RegTech in Europe

The highest use of Regulatory Technology is in Europe due to the strict and mandatory rules for financial transactions and data protection. The implementation of PSD2 (Directive of the European Parliament on payment services) and the United Kingdom’s open-banking regulation and General Data Protection Regulation (GDPR) accounted for the surge in RegTech activities in the region, allowing it to reach USD551M on 2017 (since 2013) which is approximately 18% of global RegTech shares.

Within the United Kingdom alone, in the first half of 2018, two major deals in RegTech were made that raised around USD35M. CloudPay Solutions, which provides global payroll services through cloud solution, raised USD25M. And CloudMargin, which provides cloud-based collateral management solutions, raised USD10M. These are all part of the more than USD57B investments in fintech companies globally in the first half of 2018.

RegTech in Asia Pacific

The Asia Pacific region has the highest potential in RegTech growth. With a forecast to grow at the highest CAGR during the period (2018 to 2023), initiatives in various Asia Pacific countries are bound to continuously emerge. Locations like Hong Kong, Singapore, Japan, and even Australia observed growth in the industry, with Singapore forecast to be Asia’s regtech leader.

Even with the growth in Asia, only a few RegTech startups are able to provide mature products that financial institutions can actually use. Despite this, banks are still tremendously interested in RegTech in the region. This is due to the benefit of risk and cost-reduction that RegTech provides, especially in a complex and fragmented regulatory environment. Western-based RegTech companies identified this need and brought creative and interesting solutions to financial institutions in the region. Most of them are based in countries like Hong Kong and Singapore.

In China, the Chinese Securities Regulatory Commission (CSRC) is pushing for the adoption of RegTech measures, in an effort to control the Chinese financial sector. On the 25th of May 2018, the Inspection and Enforcement Science and Technology Establishment Work Plan was adopted by CSRC as a measure to advance the adoption of RegTech. The work plan was enforced to advance data collection and data analysis projects and the rapid implementation of deep identification of non-compliant, illegal conducts. The plan outlines six key RegTech projects that includes a data concentration project, evidence collection software project, data modelling project, quality control project, investigation assistance project, and case management project, all of which aims to improve the enforcement capabilities of CSRC. The plan was also made in response to the expanding workload of the commission, with its investigatory department handling over 1,228 case leads and launching more than 1,029 investigations in 2016 to 2018, with a case completion rate of 60%.

RegTech in North America

Another report contends that North America will overtake Europe and Asia-Pacific in terms of spending on RegTech software over the next five years. In fact, North American companies were reportedly involved in eight of the top ten RegTech deals made in the second quarter of 2018. U.S. companies claimed the major share of the global RegTech investment since 2014, raising almost USD3.9B over the past five years, although their share of global deals continuously declined over the years due to the shift in global investment, moving to other parts of the world.

Changing the Landscape of Financial Regulation

According to Deloitte, RegTech is the ‘new FinTech’, an industry changing the landscape of financial regulation. The RegTech industry continues to grow with continuously innovating software, providing next-generation solutions to existing regulatory problems that traditional solutions are unable to fix and solve. Its market is following the pattern of the FinTech market due to its wide array of opportunities for transformation. Its hundreds of niche startups (over 263 start-ups and firms identified) are also forecast to become target acquisitions for larger financial institutions all over the world.

RegTech Conferences

As the industry continues to grow, new conferences involving RegTech are beginning to take root in different parts of the world. Here’s the list of RegTech conferences in 2019 that you should not miss:

1. 2019 RegTech Conference - January 17, 2019 | InterContinental New York Times Square, New York, NY
2. PSD 2 & RegTech Forum - Feb 19 – 20, 2019, Amsterdam
3. Regfact - February 25, 2019 | Diplomat Radisson Blu Hotel (venue is tentative and yet to be confirmed), Bahrain
4. KNOW 2019 - March 24 – 27, 2019 | Aria, Las Vegas, Nevada
5. COMPLY 2019 - Conference on Compliance and RegTech - May 14 – 15, 2019 |Tribeca 360 Degree, New York, USA
6. RegTech Unconference 2019 - February, 2019 | The Cube, Madrid
7. FinTech RegTech Global Summit - September 2019 | Singapore
8. RegTech Summit (London & New York City) - October 3, 2019 | etc.venues St Paul’s, London; TBD | New York City
9. RegTech Convention - November 26 – 27, 2019, Kap Europa, Frankfurt

These conferences will serve as platforms for discussion on the future of the industry and could be exploring the next innovative technology that would shape the landscape of financial regulation.