Financial services as we know them are changing as new technologies enter and disrupt the market, promising consumers and businesses more efficient, exciting, and cost-effective ways to handle their finances. From the spectacular boom in cryptocurrencies to record investment and growth for fintech companies this year, incumbent financial institutions are turning to digital innovation to match consumer demands.
Yet entering new territory can also mean entering dangerous territory: recent months have proven that providing a fully digital offering can subject organisations to an increased threat in cybercrime and difficulties in terms of compliance. Leading challenger bank Revolut recently reported potential money laundering concerns to the FCA, while the cryptocurrency space has often been referred to as the “Wild West” of financial services. What will this new territory mean for institutions that have long lived and thrived on their reputation as bastions of regulation?
The response to this digital transformation has been the impressive growth of a new branch of fintech – regtech. In recent years, we have witnessed the rise of digitally native actors ready to help incumbent banks maintain trust in their services and ensure they remain compliant, by providing clients with machine enabled, data-driven software that simplifies the regulatory process. While incumbent financial institutions hold their own in-house compliance teams, regtech companies hold the advantage of being digital natives – their ability to adapt and transform at the same pace as new technologies appear means their software remains the most cut-through, up to date software available.
Research by Thomson Reuters shows that the number of regulatory changes a bank has to deal with daily has increased from 10 in 2004 to 185 in 2017. In the past year alone, the likes of Open Banking, PSD2 and GDPR have caused upheaval in the financial community – and this will only continue to increase as the world becomes more and more digitalised. The sheer scale and pace of regulation drives banks to turn to more agile regtech companies, as their software provides the most efficient solution to an overwhelming number of rules. Moreover, given the increasing number of rules deriving from the use of technologies that rely on regtech solutions, most banks are likely to prefer turning to the digital experts in the field rather than relying solely on their in-house compliance teams.
This rapid development of technology needing regulation will further encourage the existing cooperation between digital natives and incumbent financial players. Regtech start-ups are joining the ranks of fintech and cyber start-ups as enablers to banks’ digital transformation, and communities such as Level39, where innovative businesses have access to the biggest global financial institutions on their doorsteps, are rapidly growing to facilitate this relationship. It has become apparent that regtech businesses will shape the future of compliance. More than half of respondents in a Thomson Reuters survey considered that regtech solutions were affecting how they managed compliance in their firms, and almost a fifth reported they have already implemented one or more regtech solutions.
Given increasing demand, it comes as no surprise that investment in regtech start-ups has been so rapidly increasing – research by CB Insights showed that private market investors have poured in approximately $5 billion across 585 deals globally in the last five years. And businesses are predicting investment will increase – a third of respondents in Thomson Reuters’ survey expected the budget for regtech solutions to grow in the coming year.
As a result, the next year will witness a rush of companies moving and growing into the space, nabbing the flood of investment pouring into the sector. Data provided by London & Partners earlier this year showed London had secured a record amount of investment into its fintech businesses in 2017, including regtech start-ups – I fully expect the city to continue leading the way in this branch of innovation. London-based companies such as Onfido and Level39’s ClauseMatch, have raised impressive funds since they were founded in 2012 – with Onfido raising over $60 million so far.
However, the sector will also face a number of challenges in the coming year that could cause this growth to stall. The impact that Brexit will have on the regulatory landscape in Europe is not to be underestimated – while GDPR was a headache that could be handled by regtech start-ups, the inconclusiveness of the current Brexit deal is worrying for anyone dealing with compliance. For London and the UK to continue attracting the talent needed to fuel the regtech revolution, as well as ensure the corporate world respects the right regulations, it is essential for our government to place compliance discussions with the European Union at the top of their list of priorities.
Demand for regulatory support will not only remain, it will increase as incumbent banks and digital innovators continue to venture into new territory. The growth of companies able to support incumbents in their digital future will encourage them to adopt new technologies. This will in turn fuel more demand, and so on and so forth – regtech could very well be the catalyst to financial services’ digital revolution.
Ben Brabyn is head of Level39