Regtech is a fast-growing industry, housing rapidly evolving technology solutions that help businesses comply with regulatory requirements. Some estimate the global regtech market size to reach USD 55.28 billion by 2025.
The US and Canada are key players in the global market, with many companies, institutions, and regulatory bodies working to harness innovation and shape the industry. At its core, regtech increases the productivity and effectiveness of activities undertaken by regulated organisations. Ultimately, less money is spent on fines and unproductive manual compliance, while businesses move closer to the intent behind regulations.
One of the things that differentiate North America in most domains is scale – and regulation is no different. With 50 states in the US alone, the number of regulators is vast. AI regtech company 4CRisk.ai notes the US Congress enacts four to six million words of new laws in each two-year congress. Numerous agencies specifically oversee financial institutions and markets – including the Consumer Finance Protection Bureau (CFPB), Financial Crimes Enforcement Network (FinCEN), and the Federal Reserve Board (FRB) in the US and Office of the Superintendent of Financial Institutions (OSFI), and the Financial Consumer Agency of Canada (FCAC) to name a just few.
As regtech has become more widely used, proving compliance and operational benefits, regulators have been forward-looking, anticipating its increasing importance. In the recent Industry Perspectives Report 2022 by The RegTech Association, 44% of regulators indicated regtech/suptech as key priorities, with 44% also planning to adopt in the future and 22% already onboarding solutions.
This has led to various agencies establishing programs such as FinCEN Innovation Hours, the Financial Industry Regulatory Authority (FINRA)’s Innovation Outreach, New York State Department of Financial Services DFS Exchange or the Payment Canada Summit, to encourage a deeper understanding of the industry’s solutions, and engagement between regulators themselves and providers. The RegTech Association’s global regtech showcase programs have been well supported by regulators including at the recent RegTech Edge No Borders event in New York late in 2022 and their global digital engagement offerings which have attracted 16,000 people from 85 countries since 2020.
As in all walks of life, Artificial Intelligence (AI), machine learning (ML), and data analytics have emerged as powerful technologies among the innovative regtech use cases including:
Risk assessment: AI algorithms are used to analyse large amounts of data from various sources to identify potential risks in a company's operations. ML models learn from data, better-predicting risk.
Regulatory change monitoring: The 4CRisk.ai AI-driven regtech platform offers search capability and horizon scanners to discover new changes to compliance data. The firm aims to significantly lower the cost of compliance and the burden placed on compliance teams.
Communications security and compliance: Theta Lake’s regtech solution utilises machine and deep learning, natural language processing (NLP), and enhanced user experience to capture, archive, detect, and surface risks across video, visual, voice, chat, document, and email content. Capturing and archiving data helps ensure communications are secure and compliant.
Anti-Money Laundering (AML): AI and machine learning can increase accuracy when it comes to monitoring transactions, network analysis, and detecting suspicious activities.
Know Your Customer (KYC): regtech firm Encompass uses automation to eliminate the traditionally manual tasks in KYC due diligence, evidencing the ownership structures of commercial and investment banking customers in minutes.
Compliance reporting: AI and ML can automate compliance and regulatory reporting, making it easier for companies to comply with regulations and deliver real-time insights.
Compliance can sometimes lag other areas of the business when it comes to investing in technology and process improvement. The business case for cost containment and improved regulatory outcomes losing out when pitched against growth opportunities. As a result, there is still a heavy reliance on manual procedures, which are costly and inefficient.
The recent bout of activity in the wake of SVB and Signature Bank closures in the US left many banks scrambling to staff their onboarding teams as streams of new customers looked to open new primary accounts or backup facilities. In this context, regtech also has an important role to play in enabling business growth and ensuring continued compliance through automated processes.
While regtechs in EMEA may outnumber those in the Americas (48%: 35%), the level of investment tells a different story. Data compiled by the Boston Consulting Group’s FinTech Control Tower (FCT) reports that, between 2000 and H1 2022, investors put USD 13.1 billion of equity investment into regtechs based in the Americas, representing 69% of investment globally.
Since that time, the technology industry overall has entered a different season as faced with layoffs and inflation, the ‘top-line growth at all costs’ mentality has shifted. The Industry Perspectives report indicated revenue and jobs growth and an increase in capital inflows to the industry from 2021-2022 suggesting that despite the global economic downturn regtech is well placed to weather this climate. Regulations are ever-present and solutions that offer increased efficiencies and sustainable alternatives to human cost-centred reactive tactics will help organisations ensure their house is in order ahead of the next waves of growth.
Undoubtedly, regtech has a critical role to play in society, from helping combat financial crime to improving consumer protection and data rights to boosting operational efficiencies and powering long-term business growth. Going forward, its place and worth will only increase as more businesses turn to regtech solutions and digital transformation initiatives to change the way financial services organisations operate at scale.
This editorial was initially published in the Financial Crime and Fraud Report 2023 which dives into the captivating world of fraud management, digital onboarding, and financial crime in the financial services industry. You can download your free copy here.
Deborah Young is the founding CEO of the RegTech Association. She is passionate about building a community that accelerates the deployment of technology that drives productivity and superior consumer outcomes.
Alex Ford is a Non-Exec Director of The RegTech Association and President of Encompass Corporation, North America. She partners with global FIs automating KYC.
RegTech Association, founded in 2017, aims to promote RegTech innovation and investment to support ethical and compliant businesses globally. The non-profit brings together government, regulators, regulated entities, professional services, and founder-led RegTech companies to collaborate and accelerate the adoption of RegTech solutions in the industry ecosystem.
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