I am not an expert or an authority in the area of regulation and more specifically, RegTech solutions but I understand the importance of what RegTech can bring to the work being undertaken by FinTech start-ups and banks. I traditionally tend to focus on what's happening within the FinTech and banking industry, but I take an interest in other areas and felt I wanted to share my thoughts on RegTech's importance and evolution.

RegTech Overview

I first stumbled across the term RegTech as a buzzword back in late 2015 whilst working in Singapore during a FinTech meet-up event. Regulation in the financial services industry has been around a long time but the focus on this as an area has really developed pace for a while now. There are plenty of start-ups who are developing some quite clever solutions and working exclusively with a number of the global banks.

Why RegTech? It's been well documented and also from the many meetings I have been part of that that a wider collaborative approach between banks, startups and now the regulators is driving what happens with regards to development, adaptation and adoption. Regulation as we know can be a complex beast and not for the faint-hearted, so the development of new solutions which target complex regulations with a view of reducing cost, specifically for banks is a welcome thing.

CB Insights have put together a great definition of RegTech:

RegTech typically covers a number of key areas, these include customer on-boarding or KYC, regulatory reporting, transaction monitoring and risk management. The objective here isn't purely about automation, although that's an important part, it's about the packaging and accessibility of this data and a presented view which is easy to understand.

The Evolution of RegTech

We know how quickly things can changed and what's interesting as far as RegTech is concerned, we're now in the evolution from phase 1 to phase 2 and the impact for the future and beyond. 

A quote taken from the recent Burnmark and Alvarez & Marsal: RegTech 2.0 Report

"Not surprisingly, one of the biggest beneficiaries of the RegTech revolution has been global regulatory bodies. In phase RegTech 1.0, most regulators chose to observe, sometimes closely, the potential of technology startups. Some launched sandboxes, some launched accelerators. However, RegTech 2.0 will see the emergence of a new breed of “SupTech” startups that will work alongside regulators in meeting challenges."  

The Burnmark and Alvarez & Marsal: RegTech 2.0 Report nicely summarises RegTech 1.0 and 2.0 - I found this very useful reading and thought I'd include it here.

RegTech 1.0

"Some of the earliest RegTech startups launched are now in the process of obtaining late-stage VC rounds or existing through acquisitions. The space has clearly matured over the last couple of years and attracted
 lot of attention from banks, vendors, service firms and regulators. 

Why RegTech? We believe that this sub-segment
of the wider FinTech landscape is approaching an inflexion point with regards to how regulators, banks and startups will pursue its further development, adaptation and adoption. From 2010 to 2016, RegTech established a solid foundation within the FinTech ecosystem coming up with solutions that targeted complex new regulations, litigation and regulatory remediation areas faced by banks and overall reduction of costs of compliance. 

We call this phase RegTech 1.0.  We estimate that over 300 RegTech firms were launched up till 2016. Banks, just after the economic crisis, were facing huge compliance costs, a new set of regulations, the proliferation of startups in financial services and the need to innovate quickly. Regulators were also looking for ways to support a more efficient implementation of regulations and supported the technological innovations by RegTechs. 

Most RegTech firms launched in this period dealt with upcoming regulations like PSD2 (Open Banking), MIFID II, 4MLD and GDPR. The vast majority of the solutions were delivered utilising models around SaaS and Open APIs. They also handled data in a way that was never seen before. Data collection, monitoring, analysing and reporting in the space evolved into an entirely new industry. This was primarily driven by developments in big data technologies and the wider FinTech ecosystem."  

RegTech 2.0

"RegTech 2.0 are expected to collaborate more, with banks, regulators and domain experts, to demonstrate their offerings’ success far more quickly. 

Also, as offerings in the next phase evolve from niche propositions to broader compliance propositions, they are in far more need of active support from regulators and industry consultants. 

The market of regulators and central banks around the world are also struggling with the data deluge and supervision of new entrants in the banking industry. The entire lifecycle of policymaking, enforcement and supervision is ripe for disruption with the use of advanced technology. Startups would need to be patient in handling the bureaucracy of state-run organizations and even longer sales cycles. Startups would also need to improve their knowledge of regulators’ underlying objectives and demonstrate unambiguously how their solutions can help the regulators do a better job than the status quo.

RegTech solutions developed by startups will help banks and other FI's automate compliance tasks, reduce operational risks and protect themselves against reputational damage and potential market fines. I believe in the long term that a lot of these organisations can clearly see the opportunities that will exist through the regulatory change agendas which are in place. Ultimately though, their success will be measured as to how these RegTech solutions can be maximised and will have a greater chance of succeeding in what appears to be a challenging environment. 

In the long term, those organisations that can see the opportunities that exist through the regulatory change agenda and use their RegTech solutions to maximise these will have a greater chance of succeeding in this ever-changing and challenging marketplace."

Sources: Burnmark / Alavarez & Marsal: RegTech 2.0; CB Insights