All about RegTechs

RegTechs (contraction of “regulation” and “technology”) refers to startups that develop innovative technological solutions to meet increasing regulatory requirements in the financial sector. Decryption of these actors who are transforming banking and insurance compliance! 💡

A context of increased regulation in finance

Since the financial crisis of 2008, the regulatory authorities have massively reinforced the supervision of the banking and insurance sector, in order to avoid new abuses with dramatic consequences.

New measures have thus emerged to limit excessive risk-taking and guarantee the stability of the global financial system. We can cite pell-mell:

• The Basel III agreements strengthening capital and liquidity requirements.
• The establishment of annual banking stress tests by the European Banking Authority.
• Le hardening of the Volcker rule in the United States regulating speculative activities.
• Increased transparency obligations on derivatives.

This trend towards increased regulation has been further amplified over the past ten years, with the adoption of new far-reaching directives:

• PSD2 (Directive on Payment Services 2) in 2018 in the EU to liberalize access to banking data and promote open banking.
• Le GDPR (General Data Protection Regulation) also in 2018, strengthening the control of European citizens over their personal data.
• New directives on cryptocurrencies like MiCA at European level to regulate this booming sector.
• The constant tightening of the rules for the fight against Money Laundering and the Financing of Terrorism (LCB-FT), with for example the transposition of the 5th European directive into French law at the end of 2020.

As a result, banks, insurance companies and other investment funds are now crumbling under the weight of compliance. They must allocate colossal technological, human and financial resources to meet all these regulatory obligations.

Hence the recent explosion of RegTechs, these startups offering innovative solutions to automate compliance through digital. Let's take a closer look at this phenomenon.

What is a RegTech?

A RegTech is a startup that publishes software aimed at helping financial institutions to rmeet their regulatory obligations.

The term RegTech is the contraction of " regulation » (regulation) and « technology " (technology). It is inspired by the concept of Fintech, to designate the application of technological innovations in the traditional financial sector.

RegTechs focus more specifically on compliance through innovative digital solutions. Their goal is automate as much as possible risk management, regulatory reporting, the fight against financial crime, etc.

In short, they seek to make compliance more efficient and less costly for financial institutions, thanks to disruptive technologies such as AI, big data, the cloud, etc.

In concrete terms, the tools offered by RegTechs are varied:

• digital KYCl for customer identification and knowledge
• Transaction analysis to detect suspicious activity
• Electronic archiving of documents and emails
• Automated regulatory reporting
• Digital risk management
• Fight against fraud
• Encryption and cybersecurity solutions
• Automation of business processes
• Machine learning for anomaly detection
• APIs and integration of heterogeneous systems

Some RegTechs specialize in a specific link in the compliance chain, while others take a more global approach. Let's see what benefit they bring.

The advantages of RegTechs

The emergence of RegTechs has multiple advantages for financial institutions, faced with the constant challenge of compliance:

Optimization of regulatory compliance

The main contribution of RegTech solutions is to help banks, insurers and other financial players to more easily meet ever-increasing regulatory requirements.

By automating a large part of the time-consuming manual processes, they make it possible to manage compliance in an optimal way. THE controls are faster, more reliable and can be done on a large scale.

Cost reduction

Thanks to automation, RegTechs can significantly reduce the costs associated with managing regulatory compliance.

According to some estimates, the use of RegTech solutions could save more than 100 billion per year to the financial industry!

By advantageously replacing resource-intensive manual processes, RegTechs improve the profitability of financial institutions.

Technological innovation

RegTechs are at the forefront of innovation in the field of technologies applied to finance. They adopt the latest advances:

• Artificial Intelligence and Machine Learning
• Big Data and Big Data Analytics
• Blockchain for safer transactions
• Cloud and APIs for interoperability
• Biometrics for identification
• Cybersecurity enhanced

This resolutely digital approach contrasts with sometimes obsolete legacy systems in traditional institutions.

Agility in the face of regulatory changes

As financial regulations are constantly changing, it is essential for financial players to adapt quickly.

With flexible software architectures and technology expertise, RegTechs are able to develop their solutions to meet new regulatory requirements.

Their agile approach contrasts with the heaviness of certain historical banking systems, which are difficult to update.

Expertise focused on compliance

Regulatory compliance is the core business of RegTechs. They focus their skills on this area, unlike generalist financial institutions.

This specialization allows them to offer fine solutions, capable of responding to complex compliance issues.

Use cases of RegTechs

The concrete applications of RegTech solutions in finance are numerous. Here are some common examples:

KYC and the fight against fraud

The automation of customer identification (KYC) and anti-fraud processes is a major focus of RegTechs.

Startups like Onfido, IDnow or Trulioo offer innovative biometric solutions to remotely verify a customer's identity when opening a bank account, for example.

other like Sift or Feedzai apply artificial intelligence to transaction analysis to detect suspicious activities in real time: false invoices, embezzlement, money laundering, etc.

Risk management

Some players such as OpenGamma, Riskonnect or Axinan focus on financial risk management, by providing next-generation platforms to institutions.

They integrate big data processing capabilities, scenario simulation and real-time reporting. Goal : anticipate and minimize operational risks.

Regulatory reporting

The reports required by regulators represent a heavy burden for banks and insurance companies.

RegTechs such as Wolters Kluwer, BearingPoint or Lombard Risk offer to automate their generation, while guaranteeing the accuracy of the data.

Fight against money laundering

Faced with the constant reinforcement of the fight against money laundering and the financing of terrorism, startups such as ComplyAdvantage or ThetaRay offer predictive analysis solutions.

They scan financial flows to identify abnormal activities and report them to the authorities if necessary.

The rise of RegTechs

Driven by very strong growth in funding, the RegTech market has experienced a meteoric rise since the early 2010s. Let's look at some figures revealing their growth.

A booming market

The global RegTech market was estimated at only $1,5 billion in 2015. It has since grown fourfold to reach $4 billion in 5,6 according to McKinsey.

And that's just the beginning ! Projections point to a market of 16,5 billion by 2025. The CAGR (Average Annual Growth Rate) should exceed 20% over the period 2020-2025.

This explosive growth reflects the growing adoption of RegTech solutions by financial institutions. It is also driven by the constant innovation of start-ups in this area.

Record fundraising

At the same time, the amounts invested in RegTech start-ups have steadily increased over the past decade:

• Less than $50 million in funding in 2010
• Between 300 and 450 million per year between 2015 and 2017
• Nearly $1 billion invested in 2018

Et it is not finished ! The first half of 2021 has already seen $725 million invested in RegTechs.

These massive fundraisers, from both venture capitalists and financial institutions, allow RegTechs to develop rapidly to address this growth market.

Growing adoption

Today, a large majority of financial institutions use RegTech solutions in their compliance strategy:

• 75% of banks according to a study by BearingPoint and Longitude Research
• 69% of companies insurance according to Accenture
• 63% of managers of assets according to the Deloitte survey

This adoption is accelerating as regulators tighten their oversight requirements. Traditional players no longer have a choice and must embrace these new technologies to remain compliant.

Conclusion

The advent of RegTechs marks a key step in the digital transformation of the finance industry, which has long remained lagging behind in innovation.

Their solutions perfectly combine the need for enhanced supervision of the sector with the fantastic possibilities offered by new technologies: AI, blockchain, big data…

RegTechs make it possible to envisage a future where regulatory compliance, often perceived as a burden, will become a real competitive advantage.

Without a doubt, RegTech startups will continue to grow and spread their innovations in all branches of finance. They will be valuable allies in the face of growing regulatory challenges.

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