Global Regtech & IDV Fundings & Mergers Analysis 2022/2023 – the Why

‘All catastrophes have the same effect: they sharpen our understanding of our interconnectedness and mutual dependency, they clarify our values, they encourage us to rethink our priorities, they expose our prejudices, and they build our resilience.’― Hugh Mackay, Australian psychologist, social researcher

Until some time ago, most funding and M&A articles started with encouraging market statistics, stressing the market’s potential for growth. However, for the last several months, a series of severe and mutually reinforcing shocks — the COVID-19 pandemic, the war in Ukraine and resulting food and energy crises, surging inflation, debt tightening, as well as the climate emergency — have battered the world economy, making it harder to anticipate what will happen next.

The funding and M&As market in 2022 and Q1 2023 has been dominated by a few key ideas. Firstly, daily headlines about layoffs have become increasingly common, with more than 94,000 workers in US-based tech companies (or tech companies with a large US workforce) being laid off in mass job cuts so far.

Secondly, some companies that became unicorns in the past were found to have no substance (FTX), leading to a reckoning in the market. According to CB Insights, global funding in Q3 2023 amounted to USD 74.5 billion, which is less than half the total funding received in 2021. The report highlights a 34% quarter-over-quarter decrease in funding. In Silicon Valley, funding hit its lowest level since Q4 2019. Despite some startups managing to weather the economic downturn, several were acquired, and a few collapsed in 2022 (Manchester-headquartered neobank Bank North, Israeli AI startup BeyondMinds, Berlin-based security token startup Neufund, etc.). The outlook for 2023 appears as bleak as Railsbank, a former star of the UK payments industry that reportedly raised over USD 100 million from investors, has been purchased and re-capitalised by a consortium, due to mounting financial and regulatory challenges, according to Bloomberg.

Thirdly, over the past 14 months, the average funding deal has decreased. Looking back at past funding and M&A activity in the regtech and IDV sector, several startups received over USD 200 million in 2021, such as Socure, Feedzai, Incode, and others. However, in 2022 and 2023, we have seen a decline in funding amounts, with the largest IDV funding reported by The Paypers being Veriff's USD 100 million.

Despite the turmoil of the past year, there is still growth potential in the regtech sector. In 2022, the regtech sector, globally, saw an increase in venture capital, private equity, and M&A investments, reaching a total value of USD 18.6 billion. This represents a notable increase compared to the previous year’s total of USD 11.8 billion, despite a slight decrease in the number of deals from 380 to 315, according to Statista.. It is worth noting that the value of investments in the fintech sector decreased significantly in 2022, making the increase in regtech investments even more surprising.

Nevertheless, we inhabit an interconnected world where various components have a significant impact on one another. Even if some sectors or regions are performing well, negative developments in other areas could potentially impact the entire system.

Digital identity and identity verification are crucial aspects to consider when discussing digital transformation, payment innovations, and transitioning to web3. Considering people are connected via multiple devices and platforms, verifying the identity of the other party has become increasingly important. As a result, several developments are happening in this space that warrants attention.

• Digital transformation in many sectors is accelerating, driving technology adoption;

• Young digital identity startups are leaving the market and are being acquired by established, larger competitors;

• The current competition among banks and bigtechs over digital wallets is stressing the importance of digital identity;

• Many businesses are adding behavioural analytics and biometrics to product development to boost UX, while securing transactions;

• Businesses are increasingly adopting generative AI solutions;

• The evolution of the reusable identity market is seen as an important layer to building web3

• Privacy and data protection laws are becoming more stringent worldwide;

• Regulatory updates around digital identity and customer data across the globe (eIDAS 2.0 in the EU, the Revised Digital Identity Guidelines from NIST in the US, Chinese Banking and Insurance Regulatory Commission’s (CBIRC) new rules on consumers' rights and interests, etc.);

• The rise of decentralisation in finance, communication, entertainment, and other industries is driving the demand for user control over personal data. This has resulted in the widespread adoption of Self-Sovereign Identity (SSI) solutions.

• There is a noticeable interest in the crypto industry;

• Shifting to greener energy, quantum computing breakthroughs might influence the development of digital identity solutions.

Having reviewed some of the factors shaping the digital identification market, let's explore some of the major trends currently dominating the regtech industry.

• Financial institutions are searching for solutions to navigate the economic impact of the ongoing war in Ukraine, which includes sanctions and disrupted supply chains, as well as compliance risks and potential threats to all industries.

• The high inflation and the rising cost of living are leading individuals to fall prey to scams and even turn to criminal activities such as money laundering or committing fraud to make ends meet.

• The increase in digital onboarding in the financial sector provides a more efficient and cost-effective onboarding experience for customers and financial institutions while also reducing the risk of fraud.

• The impact of the use of cryptocurrency on AML programs

• The latest regulatory updates around crypto (MiCA), APP fraud, Ultimate Beneficiary Ownership (UBO), sanctions screening, and AMLD6

• The rise of global sanctions.

These factors are driving significant changes in the funding and M&A landscape. In our upcoming articles, we will delve into some of the headline-making investments and partnerships featured in The Paypers in 2022 and Q1, 2023.

We will profile key companies that have been included in our Financial Crime and Fraud Report 2022 and made an impact such as iProov, Veriff, InnoValor, Shufti Pro, Trulioo, Ping Identity, and others. We will also feature new players (in terms of our fincrime report participation), such as Lucinity, Ripjar, Hawk:AI, OCR Labs, Fenergo, Alloy, Sardine, Chainalysis, ForgeRock, and more. Stay tuned for an exciting exploration of the regtech and identity verification market!

* Join us at the beginning of May 2023 for the launch of our highly anticipated Financial Crime and Fraud Report 2023, where we will delve into the latest trends dominating the Regtech and IDV M&A. Get ready to dive into a more detailed overview and gain valuable insights that will help you stay ahead of the game. Don't miss out on this exciting opportunity!

About Mirela Ciobanu

Mirela Ciobanu is Lead Editor at The Paypers, specialising in the Banking and Fintech domain. With a keen eye for industry trends, she is constantly on the lookout for the latest developments in digital assets, regtech, payment innovation, and fraud prevention. Mirela is particularly passionate about crypto, blockchain, DeFi, and fincrime investigations, and is a strong advocate for online data privacy and protection. As a skilled writer, Mirela strives to deliver accurate and informative insights to her readers, always in pursuit of the most compelling version of the truth. Connect with Mirela on LinkedIn or reach out via email at mirelac@thepaypers.com.