Regtech M&As and investments under the microscope – Part 1 - Europe

‘Our goal is that all of our clients are in a position to build better digital experiences for their consumers’, Terry Angelos, Senior Vice President and Global Head of Fintech at Visa

‘We would love it if every bank had the latest tools to onboard clients and build digital experiences.’ 

There has been an amazing explosion in fintech investment over the last decade. Ever since the 2008 financial crisis there have been many funds pouring into fintech, whether in insurtech, payments – lending, regtech, suptech aiming to transform the financial world, make it more resilient, customer-centric, and innovative.

In 2020, global fintech investment meant about 2,861 deals in  venture capital, PE (Private Equity), and M&A, totalling USD 105.3 billion. These funds support innovative ideas that enable challenger banks, neo banks, and fintech companies to scale by hiring the best developers, marketing and sales professionals, tap into emerging technologies and new markets, to create digital-first experiences for users. Still, one cannot talk about payments, banking, and the thriving fintech space without also referring to regtech.

Regtech in a nutshell

The word regtech refers to the technology used by the financial industry to comply with relevant regulations such as KYC, AML/CTF, and PSD2/GDPR/PDPA (Personal Data Protection Act) in a more intuitive, accurate, and efficient manner. It can also denote ‘regtech for regulators’, sometimes known also as ‘suptech’, meaning the tech used by the industry and supervisory authorities to implement and enforce regulations. These two streams of regtech, one for the industry and one for the regulator, ‘share the same kinds of technologies, rooted in common sources of digitised information and data flows’, focus on the same core problems, and are mirror images of each other, according to AIR RegTech Manifesto.

The Manifesto, published by the Alliance for Innovative Regulation (AIR) aims to help transform financial regulation from manual, analog design to digitally native design. AIR is an informal alliance of innovators across the financial regulatory ecosystem – regulators, consumer advocates, fintechs, regtechs, and financial institutions. The Manifesto argues that financial regulation, in the US and globally, needs to be remade to equip regulators with the information and tools they will need to be effective in the Digital Age.

What are the key factors driving the growth of the regtech market? 

The 2008 financial crisis has been a crucial moment for the banking industry: it has increased the number of laws banks must abide by and the frequency of reporting to regulators. Back then, many of these processes – reporting, checking, monitoring – were done manually – demanding lots of time, costs, and skilful and talented people. But gradually, banks have discovered that they can speed up routine tasks and reduce human error, while efficiently comply with anti-money laundering checks on customers, monitor transactions for fraud, send data to regulators about levels of capital, and assess if customers can afford a loan by adopting technology (cloud, artificial intelligence, biometrics) by using regtech.

The global regtech market is estimated to reach USD 13.4 billion by 2025, growing at a CAGR of 17.5%. Key factors influencing the growth of the market include:

• tackling with new (and increasing) regulatory complexity such as PSD2, GDPR, AML6.

• increased penalties and personal liability - in 2020, fines for non-compliance with AML, KYC, data privacy and MiFID regulations against the financial sector totalled USD 10.6 billion, rising 27% from 2019, according to a report from Fenergo. Moreover, over 212 individuals were fined USD 99.3 million in 2020 for AML and MiFID compliance breaches, across the globe.

• increased compliance cost - according to Medici’s RegTech Top 21, 2020 Edition, 10 - 15% of the total operating expenses of the global banks is dedicated to compliance activities USD 270 billion per year.

• increasing digital new habits of customers (when accessing financial services) that demand faster and less cumbersome onboarding processes, possibility to access their finance and make payments everywhere, anytime, real-time. This seamless UX offered by challenger banks, that have adopted biometrics, data analytics, and other emerging tech, to solve customers’ real problems and needs, have forced incumbent banks to thoroughly consider investing in e-KYC and business onboarding (e.g. micro merchants).

• the exponential growth of regulatory needs sparked by the pandemic - remote working and digitisation of services have led to new complications for businesses such as providing secure system access to employees. Also, the sudden requirement to digitise processes, including previously paper-based transactions and verification, in-person meetings, business travel, and other ‘2019 normal’ day-to-day operations has forced financial institutions to adapt and modernise quickly to keep their operations running, while staying compliant.

• the rising number of fraudulent activities such as money laundering taking place in the financial sector.

All these factors have intensified work around monitoring, verifying, detecting, and stopping negative actors from entering the payment system, plus meeting compliance and manage risk. To cope with this situation, financial services businesses have turned to technology to reduce regulatory complexity and compliance costs. Some have got rid of their legacy systems (and manual processes) and reinvented themselves, by developing their in-house solutions or partnering with regtechs to access sophisticated techs, others patched/ added new features to existing infrastructures.

However, Forrester advises technology decision-makers to abandon the traditional ‘buy versus build’ mentality, and instead adopt a ‘buy, build, extend, and assemble’ approach. This enables creating a banking development platform that takes full advantage of the benefits of commercial components where possible.

Regional buys and investments

Regulatory complexity, customers demanding services and products that match their increasing digital habits, costs, meeting compliance, etc. have led to a market growth and have intensified investment and acquisitions in this space. Whether they want to expand to other geographies, access cool/revolutionary technology, strengthen their products and services portfolio/capabilities, develop financial platforms that encompass best-in-class transaction monitoring/KYC/onboarding technical solutions, companies go on a buying spree. Furthermore, highly talented teams and promising regtech solutions have attracted many VC to support these startups until they reach their full potential. To help you learn more about these promising companies and the market interest they stirred, let’s dig into the largest M&As and investments happening in regtech across the globe for the last 12 months.

Europe

At the end of 2020, multinational management and technology consulting firm, BearingPoint sold its independent Regulatory Technology (RegTech) business unit to Nordic Capital. One of the goals of the transaction is to enable accelerated growth for the unit as a separate software company with specialised professional and managed services along the regulatory value chain. Moreover, with Nordic Capital as the new owner, the RegTech business aims to push ahead with its international expansion against the backdrop of regulatory harmonisation. All in all, the independent regtech unit was expected to generate revenues of close to EUR 100 million in 2020.

To boost their efficiency, many banks, brokers, asset managers, hedge funds, and corporations select cloud-based platforms for regulatory reporting, execution analysis, and business intelligence solutions to comply with transaction reporting regulations across multiple jurisdictions in one place. One such platform is offered by compliance technology provider Cappitech, a privately held Israeli company. In 2019, IHS Markit, a global provider of critical information headquartered in London, analytics, and solutions, selected Cappitech’s platform as a key component of its SFTR (Securities Financing Transactions Regulation) solution. Capitalising on the established relationship and existing integration, at the beginning of 2021, IHS Markit acquired Cappitech to expand its suite of global, multi-asset class transaction regulatory reporting offerings.

In terms of large investments, UK-based Ideagen secured GBP 100 million from existing long-term banker NatWest and new partner Santander. Ideagen provides information management, safety, risk, and compliance software solutions that allow organisations to achieve regulatory compliance. There is a lot of potential behind this regtech, as 2020 - 2021 has been a strong period for the company, according to Ben Dorks, CEO of Ideagen. The Group has shown excellent growth, both organically and through strategic acquisitions, and is listed on The London Stock Exchange AIM market. For the financial year ending April 30th, it recorded revenues of GBP 65.6 million, which is up by 16%. In the last decade, it has grown its staff by 5,000% having acquired 21 companies.

Europe’s (potential) unicorns

Fenergo – This spring, Astorg and Bridgepoint signed a definitive agreement to acquire Fenergo, a provider of KYC and Client Lifecycle Management (CLM) software solutions. Fenergo has strong potential for continued growth given the increasing importance of digitalisation and compliance. In the financial year ending March 2021, Fenergo’s revenue increased by 17% to USD 107 million. While financial terms of the transaction were not disclosed publicly, the Irish Times cited industry sources to claim that the deal was valued at USD 600 million. This pushes Fenergo’s market valuation to USD 1.165 billion, making it one of Ireland’s new unicorns.

ComplyAdvantage – According to Akash Bajwa, an investor at Augmentum Fintech, ComplyAdvantage has the potential to become a unicorn in 2021. More than 500 enterprises in 75 countries rely on ComplyAdvantage to understand the risk of who they’re doing business with. The regtech has four global hubs located in New York, London, Singapore, and Cluj-Napoca and is backed by Ontario Teachers’, Index Ventures, and Balderton Capital. It has recently announced a new investment by the Growth Equity team in Goldman Sachs Asset Management. The regtech company will use this new investment to cement its position as a part of the value chain for companies managing risks around AML, KYC, and broader financial crime. Moreover, the company also announced the availability of a new program called ComplyLaunch that provides free access to the company’s AML tools and education for startups.

Quantexa - Amid the pandemic, London-based Quantexa raised USD 65 million in July 2020, with new and existing investors including Evolution Equity Partners, British Patient Capital, and ABN AMRO. Moreover, this week it has also added an extra USD 153 million in Series D funding from Warburg Pincus and other investors to boost Contextual Decision Intelligence tech adoption. Quantexa’s technology helps seven out of the Top 10 banks in the UK and Australia and has clients across Europe, North America, and Asia. These clients use Quantexa to manage and connect internal and external data sources into an accurate single view and then be effectively applied across use cases spanning the customer lifecycle, such as prospecting, continuous KYC, risk management, financial crime, and fraud detection, as well as investigations. Quantexa serves over 70 countries, with its newest APAC regional offices now open in Melbourne, Australia, and Singapore. To support this expansion, Quantexa, which started in 2016 with just six founding colleagues, has increased its workforce by 18% in the last year to over 300 employees worldwide. In addition, its partner ecosystem continues to grow with key global alliances announced with Accenture and Deloitte.

Will firms like Quantexa, ComplyAdvantage that have made it beyond startup status and reached self-supporting critical mass, with higher revenue, employees, and customers, look to go IPO or be bought by a much bigger player?

In our next instalment we will be covering the US and Asia in terms of regtech M&As and investments. Until then, in case you have some other companies in this space that we missed in our European overview, feel free to share their name with us.

About Mirela Ciobanu