Published on November 29, 2016 by Ritobrata Roy
To meet rising regulation and reporting requirements, financial institutions (FIs) are increasingly turning toward RegTech firms – companies that address these challenges through technology deployment. This is of growing relevance, as expenses on compliance management account for 15-20% of operating costs of most major banks. FIs global annual spending in this area is over USD 70 Bn, and continues to rise.
Typically, the required data resides in different bank systems and is hard to extract in the appropriate structure/quality, as automated, algorithm-based data aggregation, integration, and enrichment cannot be performed using legacy software codes, thus making internal compliance efforts slow and expensive. This is where RegTech comes into the picture – deployment of highly automated, scalable methods to extract and integrate data from banks’ proprietary systems, third-party data providers, and public sources. Being mostly cloud-based, RegTech solutions enable remote and secure maintenance, management, back-up and sharing of data, while also providing customers the ‘pay-as-you-use’ option.
The most common RegTech applications are used in the following four areas with varying degrees of effectiveness in terms of customer experience, cost efficiency, compliance effectiveness, and provider maturity.
Clustering has also been observed in the RegTech space – both geographically and within the solutions space. The Reporting and Risk Management solutions space is densely packed with RegTech firms. This is probably a reflection of the fact that FIs are mostly investing only in the ‘bare minimum/must-have’, i.e., regulatory/compliance reporting solutions, and not yet in the ‘good-to-have’. In fact, despite the rising adoption of RegTech solutions, most FIs are yet to fully subscribe to regulatory solutions. On the other hand, the RegTech geographic cluster shows dense concentration of firms in the US, the UK, and Ireland. Nearly a third of those are incorporated in the UK. Several factors are key to UK’s emergence as a major hub for RegTech startups – the Financial Conduct Authority’s (FCA) active role in fostering innovation, the setting up a ‘regulatory sandbox’ for companies to test and discuss their solutions at an early stage with regulators, a conducive ecosystem comprising tech companies (established and startups), a vibrant VC funding market, and an abundance of talent. On the other hand, while APAC accounts for nearly 35% of the software spending, very few firms are based out of this region.
The effects of Brexit on the UK’s FinTech and RegTech spaces will only become clear when its relationship with the EU is coherently defined. Industry leaders opine that the priority is to retain the UK’s access to the single market. Market access is also critical for securing talent from EU member states. Moreover, the European Investment Fund currently provides the UK with GBP 9bn in venture capital – 37% of the total. The UK government has to fill this gap to avoid a fatal squeeze on investment and liquidity for early-stage firms.
The industry is poised to succeed as global demand for regulatory, compliance, and governance software is expected to reach USD 118.7 Bn. by 2020. North America is expected to overtake Europe and APAC in terms of spending on regulatory software over the next five years. Handling large amounts of complex data stored across locations in different formats, coupled with emerging regulations, will require smarter, more efficient solutions to bring down costs, improve efficiency and risk management, and enhance customer experience – which is exactly what RegTech is here for.
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About the Author
Delivery Manager, Strategy Research and Consulting
Ritobrata works in the Strategy Research and Consulting practice at Acuity Knowledge Partners. He has over 10 years of experience across the Corporate and Development sectors. He currently leads engagements related to go-to-market strategy, market entry and expansion strategy, procurement research, competitive intelligence and benchmarking for clients across multiple industries, such as, technology, FMCG, transportation and real estate. He has also worked extensively in the financial inclusion domain and has provided rating, research and consulting services to multilateral development banks/ agencies, financial institutions, and donors.
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