The last twelve months have seen a classic cycle play out in regulatory technology or RegTech. In the first half of 2018, companies continued to invest heavily in RegTech and the number of start-ups and venture capital investments rose rapidly. Compliance management, reporting, identity management, and risk management were all areas of high interest.
Research and Markets estimated global RegTech market revenue at $2.3 billion for 2018 and see it reaching $7.2 billion by 2023, growing at a compounded annual growth rate of 25.4 percent from 2018 to 2023.
While growth prospects for RegTech remain strong, we saw some consolidation and hesitation in the second half of the year. Equity markets experienced volatility – with the S&P 500 experiencing swings of as much as 20 percent within the year — while new trade and geopolitical issues continued to surface, causing some firms to postpone planned investments. We have seen some financial services firms undertake reviews of their overall compliance strategies to reflect the growing regulatory emphasis on consumer rights and data privacy, as evidenced by the Global Data Protection Regulation (GDPR) in the European Union and the California Consumer Privacy Act (CCPA). We also saw some clients narrow their focus to “fit for purpose” solutions designed to deliver immediate results and an accelerated return on investment.
Despite continuing volatility in the marketplace, we expect 2019 to be an important year for RegTech, based on three factors:
- Continued emphasis on cost reduction. Banks and other financial services firms are using RegTech solutions in traditional compliance areas such as anti-money laundering (AML) and know your customer (KYC) initiatives. Some large banks are spending as much as $500 million annually on KYC and customer due diligence programs; RegTech solutions can help control these costs. In the AML area, RegTech solutions can reduce the number of false positives, meaning that compliance and risk professionals can spend their time on real issues.
- Extension of RegTech into non-compliance areas. Financial services firms are using RegTech solutions based on automation, analytics, artificial intelligence and other innovative technologies to address non-compliance issues such as collection of past-due invoices and the generation of timely, accurate invoices. Relatively modest investments in these areas can have a substantive impact on the bottom line.
- New and challenging regulatory concerns. In addition to new rules related to privacy and consumer rights, European banks appear to be responding to the “open banking” environment fostered by the Second Payment Services Directive (PSD2). And, while no one knows yet how Brexit might play out, financial services firms are scrambling to adapt to a post-Brexit environment. As Ireland shows no indications of wanting to leave the European Union (EU), Dublin is emerging as a center of RegTech innovation, helping EU banks and corporations address regulatory cost and complexity.
The UK’s RegTech Council says it takes 30,000 pages and 1.5 million paragraphs to describe the rules in the Markets in Financial Instruments Directive (MiFID) II alone, and that MiFID II has cost the industry some €2.5bn to date to implement. Regulation in the U.S. and elsewhere is no less complex. So, we can anticipate financial services firms using all the resources at their disposal – especially advanced regulatory technology – to maintain compliance while looking for new ways to establish competitive advantage.