An internationally-recognised thought leader in digital identity and financial services, UK-based, holds a speech for the Colombia Fintech Association. The payment is blocked when the organisers try to pay him, though both parties are respected entities.
Bradford jeweller, Fowler Oldfield’s predicted annual turnover was GBP 15 million when first taken on as a client by NatWest in 2011. However, over the next five years, Oldfield deposited GBP 365 million with the bank, including GBP 264 million in cash, some of which were brought into a branch in bin bags.
Therefore, it seems that law-abiding citizens are getting blocked from accessing the financial services system, while nefarious actors such as terrorists, money launderers, drug dealers, or corrupt politicians are getting inside. How is this happening? The money laundering/terrorist financing regime is virtually non-effective in disrupting illicit finances and serious crime, with the Financial Action Task Force (FATF) identification guidelines and practices resulting in a ‘largely bureaucratic’ process that does not guarantee that identity fraud will be prevented effectively. Moreover, the current enterprise-wide risk assessment is too prescriptive and less agile than is required in the current business environment.
On the other hand, compliance costs for banks and other businesses could be more than 100 times higher than the amount of laundered loot seized and it has been found that worldwide spending on AML and Sanctions compliance by financial institutions exceeds USD 180 bln annually. In Britain for instance, the authorities have received more than 50,000 reports of potential misuse of its ‘Bounce Back Loans’ and furlough schemes.
We cannot conclude but quote financial-crime expert Ronald Pol that the global AML system could be ‘the world’s least effective policy experiment’.
But not all is gloom and doom. At the other end of the spectrum, we are living in a world of data science, machine learning, and artificial intelligence (AI) that could detect any anomaly in real-time. Digital KYC and AML solutions can automate processes and eliminate manual and paperwork. Plus, they enable businesses to establish customer identities, categorise them by risk profile, and monitor their transactional behaviour for suspicious activity before nefarious actors can convert illegal funds or move them into the legitimate financial system. By coupling these solutions with expertise coming from skilled financial crime fighters, dedicated associations, private and public partnerships, as well as numerous regtechs that have started to take seriously on illicit finance, we could create a faster, more cost-effective, and more transparent approach to our global AML system.
As regtechs and fraud prevention companies play a crucial role in fighting financial crime, it makes a lot of sense to discuss what happened in this space in 2021 and try to envisage what is coming up next. So, let's discuss the reasoning behind these investments, what were some of these investments, M&As, and hot companies to watch out for in different geographies – Europe, Americas, and Asia.
Investment in the regtech sector more than doubled year on year to hit USD 18.9 billion in 2021, beating the previous high of USD 7.8 bln set in 2020. The huge investment growth was driven by 61 deals valued at USD 100 million or more, compared to just 24 such transactions recorded in 2020. The biggest deal so far in 2021, in terms of companies servicing the financial sector, was completed by US-based identity platform Acuant, bought by UK-based fraud prevention company GBG for USD 736 million to expand into the US.
1. Taking advantage of the new complex regulations – remote KYC, GDPR, data privacy, etc.
Customers who reported a better-than-expected compliance onboarding experience were much more likely to remain loyal, according to RegTech Associates, a UK-based research company. This enhanced experience of compliance onboarding leads customers more likely to recommend their provider, more likely to buy more products, less likely to make a complaint, and also less likely to switch providers.
2. Adoption of digital channels and rise of virtual KYC that demand new technology.
92% of firms said that the pandemic has positively impacted the adoption of cloud-based products, according to a survey conducted by ClauseMatch. The most dominant trend throughout the pandemic was the increase in remote compliance, with 92% of organisations shifting to a remote working model during the pandemic. Because of this, many employees have turned to unmonitored communication apps such as WhatsApp to share sensitive information. Plus, the pandemic has caused a rise in virtual Know Your Customer (KYC) checks.
3. Increased use of AI to fight fraud, while solving and bringing efficiency to outdated compliance processes – hence partnering with an AI provider.
A recent blog post by OneSpan has underlined five key trends that the industry should watch out for in 2022 in the security and fraud detection space and why they will be important. Besides the growth of digital identity initiatives and keeping an eye on security measures and fraud prevention for embedded finance offerings, the final trend outlined by OneSpan is that AI will lead the regulatory agenda in 2022. One of their surveys revealed that 32% of FIs are putting AI in place to comply with regulations, implying that policies and legislation about the use of AI will lead to regulations in 2022 and beyond.
4. The good guys getting together to fight the bad guys.
In an age where more and more people are moving online, the importance of security and fraud detection has expanded dramatically. Phishing, social engineering, identity theft, ransomware, ATO, APP fraud, and other types of fraud have soared during the COVID-19 crisis, as millions of people have been working from home. Thus, one solution for businesses to take on these threats and up their game is to enhance their capabilities by joining forces with other players in the industry.
5. The emerging types of fraud and the need for blockchain analytics solutions to fight them.
The mystery and newness of crypto make scams related to this new type of asset highly appealing to fraudsters. Australian Federal Police reported a 172% rise in cryptocurrency scams from January to November 2021. Fraudsters lure victims into get-rich-quick schemes using social engineering tactics to target their victims’ lifestyles or demographics. Fraudsters will use high-pressure tactics to convince victims that a once-in-a-lifetime, low-risk high-reward opportunity is available to them. Cryptocurrency scams are becoming increasingly popular with fraudsters for these types of schemes, notably in the Asia-Pacific region. Moreover, the regulatory demand around cryptocurrencies and the addition of digital currency products might escalate the regtech demand, plus the need for blockchain analytics companies.
6. Early-stage funding.
Even if investments in the top 10 most valuable firms alone hit over USD 5 billion in 2021, early-stage funding was also strong, suggesting that the market has yet to consolidate. If we look beyond the huge funding numbers, the regtech sector saw strong levels of deal activity at the early-stage segment of the market with 348 deals under USD 50 million recorded in 2021, a growth of 12.9% YoY.
7. Using your talent to help others in your community.
Another investment driver is Frances Zelazny’s reason to found Anonybit, a company that develops decentralised biometrics, which is to do with what you are passionate about and bringing your input to society. ‘The time has come for me to step into the founder role and bring my passion and know-how into a space that I know intimately well and to address how our data is stored and managed.’, says Frances. So, we need strong and good passionate people, especially in the fraud prevention space, we need people who sense ‘how precious our identity is and what an awesome responsibility the industry at large has to put safeguards in place to protect the data that was being collected and analysed by our customers’.
Most of the M&As activity continues to take place in big technology and innovation centres or major financial services hubs located in London, San Francisco, and New York battling for the top spot. In 2020, London recorded the most deals with 33 transactions, while the other two cities saw 25 and 29 funding rounds, respectively.
In 2021, New York drew level with London at the top spot as regtech companies based in the two major cities completed 39 transactions each. With a strong financial services sector and the natural first step to expand into the US for many European companies, New York is fostering a strong regtech ecosystem. Interestingly, Tel Aviv was the only city outside of the US and UK to record more than 10 regtech deals in 2021. The city is home to Cappitech, a regulatory reporting company acquired in January 2021 by IHS Markit, and Cobwebs Technologies, an anti-money laundering intelligence solution, which were both recognised as regtech100 companies previously. The largest deal this year was raised by Aqua Security, a cybersecurity platform, which completed a USD 135m Series E round in March 2021.
Overall, it seems that the regtech space is filled with opportunities, as for the last few months we have witnessed a sharp rise in spending on regulatory solutions, due to changes in working practices, the rise of (emerging types) fraud, market consolidation, tapping into new markets and technologies. And we cannot conclude by wondering as Amy Gavin, Senior Strategist at 11:FS ‘I don't think the investing trend will go away. I think people are quite hooked on it now. And that will continue but I think it will be about - can these firms that did get that huge growth…can they retain those customers, that new generation?’. It remains to be seen.
Next, we depict the big players in regtech and IDV (identity verification) providers in Europe, the Americas, and Asia, along with companies and industry unicorns with high potential to watch and make our bets for the whole of the 2022 year.
Stay tuned.
This editorial was first published in our Financial Crime and Fraud Report 2022, which showcases the innovation and development of the best practices and instruments used by financial institutions in their fraud prevention activities, to improve the digital onboarding process of their customers while fighting against financial crime.
About Mirela Ciobanu
Mirela Ciobanu is a Senior Editor at The Paypers and has been actively involved in drafting industry reports, carrying out interviews, and writing about innovation in payments and fintech. She is passionate about finding the latest news on AI, crypto, blockchain, DeFi and she is an active advocate of the need to keep our online data/presence protected. Mirela has a bachelor’s degree in English language and holds a master’s degree in Marketing. She can be reached at mirelac@thepaypers.com or via LinkedIn.
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