It has been a big year for RegTech, with $6.5bn being invested in just the opening three quarters. With the year coming to an end, it begs the question of, what is next for the sector?
Compliance automation platform Ascent has taken a retrospective look at the past 12 months and picked up its crystal ball to predict how the next year will unfold. Its CEO Brian Clark said, “RegTech is no longer just for early adopters. We’re starting to see the actual, tangible benefit these technologies can provide.”
One of the main trends Ascent saw take shape during 2019 was the end of RegTech being an idea and something which will happen to become a real change and take shape. Companies moved beyond their pilots and test phases into operations.
As the wheels on the sector began moving, it meant RegTechs either found or connected with a market demand or they failed to do so, resulting in the first handful of failures. Ascent said, “Ultimately, this will be good for financial institutions as it will make it easier to identify which companies are truly creating value.”
Another key development of RegTech this year, according to Ascent, centred around regulators and their increased interest in the technology space. Regulators began to ask what firms are doing to leverage RegTech, paving the way for a more technology embraced ecosystem.
Regulators did not only spend the year talking, but also stepped up their efforts enforcing compliance. Regulations and privacy legislation became global, leaving firms operating internationally with more rules to adhere to.
Ascent also stated that pressures to comply increased, with more enforcement actions happening and higher financial fines hitting firms. It stated the UK’s FCA issued 160 enforcement actions this year while the US’ SEC deployed a staggering 2,754 enforcement actions.
The RegTech sector in 2020
As we move into the next decade, Ascent believes 2020 will be about moving away from the innovation phase and towards locking down operationalizing and scaling. Their goal should be to answer the financial institutions question of whether the solution actually works.
Investment into RegTech has been growing for the past five years and is showing no signs of slowing. Ascent stated, “We expect we’ll continue to see more funding, but it will be of the middle-stage, thoughtful kind. Now that the ideas are out on the table, investors will be looking to find companies that are demonstrating product fit by acquiring more customers. This will be a tell-tale sign for financial institutions, too, as they evaluate potential solutions.”
With these later-stage deals, RegTech will continue to diverge from the wider FinTech sector and establish itself as its own industry, Ascent said. The company expects this to come with additional technologies and ventures popping up to create a supportive ecosystem.
To help sifting through all of the opportunities available, financial services should look for consultancies which can help them evaluate and implement RegTech solutions.
2020 for financial services
Ascent believes increasing cost pressures are on the horizon for both the buy and sell side, as well as shrinking margins and the rise of arduous FinTechs and challenger banks. This will further drive the consolidation trend and the realization technology is the key of the future, it added.
“Increased globalization means increased risk. We expect this trend from 2019 to only get more prevalent and more dangerous. Think of it as a simple risk array: Firms are operating in more marketplaces doing more things with increasingly larger penalties — and they’re doing it with the same amount of staff. They can scale up personnel until payroll begins to buckle, or they can turn to technology.”
Regulators in 2020
Privacy, cybersecurity and cryptocurrency have all received a lot of attention during 2019 and Ascent this will continue to receive the focus of regulators. Brexit has also dominated headlines for quite some time and as the day of leaving the EU edges nearer, more regulators will focus on ensuring compliance runs smoothly.
If regulators want to see privacy and cybersecurity issues decrease, Ascent believes they need to become stricter with enforcement and hit firms with even heftier fines.
Ascent said, “Jurisdictional arbitrage is no more. The days when you could choose your jurisdiction according to a region’s regulatory policies are largely over. The globalization of the marketplace means that more financial institutions (including many SMEs) are operating in multiple countries, and so they’re forced to abide by all of the regulatory bodies governing those countries.
“Compliance and Risk teams are then given the mammoth task of somehow knowing all those rules, keeping up to date on them, and following them — which, for simplicity’s sake, often means universally abiding by the strictest.”
Finally, Ascent sees more collaboration taking place amongst regulators as they work together to find and implement technology solutions. However, this does not mean their will be cohesion across compliance requirements. “Even as the marketplace becomes increasingly global, each regulator will have to abide by its own government mandate. After all, they don’t serve the financial institutions they audit but the consumers of their respective jurisdictions. Ultimately, there’s only one way to reconcile the differences between regulatory requirements — via technology.”
What Ascent is looking forward to in 2020
The startup leverages AI to generate the regulatory obligations and ongoing rule updates which impacts specific customers, saving them time and money in analysing regulations. With each regulation on the system, a customer has access to a unique obligation register which specific to their business and automatically updated.
Earlier in the year, the company secured $19.3m in a Series B round led by Drive Capital. With the fresh funds, the company is looking to scale and deepen the operations of its business.
The RegTech was also part of the Global Financial Innovation Network (GFIN) to pursue a cross-border pilot earlier this year. “We believe the opportunity to collaborate directly with regulators could create value for the entire market, helping firms to operate more efficiently and to reduce costs while consumers are better protected. We’re excited to see what the future holds for this initiative.”
“Just as 2020 is shaping up to be a big year for RegTech as an industry, it’s looking to be another banner year for Ascent.”
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