Written by: Dr. Amanda Lim and Dr. Kyle Wong
RegTech (Regulatory Technology) is the use of new technologies to improve the way businesses manage regulatory compliance. RegTech companies adopt emerging technologies to power the digital transformation for regulatory compliance. The estimated RegTech industry revenue is around US$ 5.232 billion in 2020. The market is expected to grow significantly in the period of 2021–2026 at a CAGR of 20.9% to reach USD19.32 billion by 2026 (1).
The high demand for Regtech solutions may occur due to the high and continuous growing compliance cost. Compliance in average takes up 10.3% of a financial institution’s HR cost, 42.3% of accounting and auditing service spending, 38.2% of consulting and advisory fee, 22.7% of legal spending, and 17.1% of data processing expenses (2). The compliance cost increased more during the pandemic time.
The coronavirus pandemic has driven the deployment of the social distancing measures and flexible working arrangement. A lot of financial firms have implemented technology to enable business activities to run remotely and continuously as countries went into lockdown. This also forced financial services firms to deploy Regtech solutions to monitor online and remote operational risks.
Evolving Regtech solutions can be categorized under Regulatory Reporting, Risk Management, Identify Management & Control, Compliance, and Transaction Monitoring (3). Seeing the Regtech market demand, technology start-ups ride on the emerging A, B, C, D, M, N or O technologies (i.e. AI, Blockchain, Cloud computing, big Data, Machine learning, NLP (Natural language processing), and OCR (Optical Character recognition) technologies) to develop different categories of Regtech solutions.
Using NLP and AI-based text analysis technology can disparate and assemble regulatory information easily under defined categories for supporting data analysis and compliance needs. AI powered OCR technology can facilitate document review, content recognition and transaction monitoring. If digital rules are defined properly and AI models are built, some processes of due diligence can be done automatically. AI and machine learning can digest more data and information extremely fast using a proper AI model. The AI model can improve over time as big data stored in the cloud can be accumulated and possessed for machine learning. Regtech for compliance and regulatory reporting requires data transparency and security consideration. Blockchain technology facilitates transparency improvement due to distributed ledger and security enhancement through cryptography.
Riding on the growing demand of Regtech solutions to solve compliance and regulatory issues, many fintech investors have been investing in the Regtech start-ups. As investors are expecting a high growth potential of the Regtech start-ups value, the global RegTech startups funding between 2017 and 2020 also increased exponentially. The total funding grew in the period of 2017–2020 at a CAGR of 74.7% to reach nearly USD8 billion at the end of 2020. Global RegTech funding in Q1-Q3 2021 is already over USD11 billion. The total capital invested in the first three quarters is already 68% higher than the whole year of 2020 (4)
In the period Q1-Q3 2021, Regtech start-ups including Snyk, Checkr, Quantexa, Persona, Securrency, and Comply Advantage, successfully raised a significant amount of funds to support their R&D needs and business growth.
During the period, the largest deal was completed by Snyder, which provides Regtech risk management solutions. It provides a cybersecurity platform that helps businesses to integrate security into their existing workflows. The key technology used is cloud computing. After raising USD 530M, the company valuation is USD8.5 billion (4).
Around the same time, Checkr reached USD4.6 billion valuation with the new funding raised USD250 million. Checkr’s platform uses AI technology to perform 30 million background checks a year for companies like Uber. The company has revenue well above $200 million (5).
In Q2 2021, Quantexa raised a growth round of USD153 million. It has been building AI-based transaction monitoring solutions to help detect and stop money laundering, fraud, and other illicit activity (6).
In Q3 2021, Persona raised USD150 million and reached its valuation at USD1.5 billion (7). Persona provides Identity Management and Control solutions to help companies to securely collect, verify and manage identities using its identity infrastructure.
In the early of 2021, Securrency raised $30 million in a Series B funding round (8). It is a blockchain-based compliance tools provider for banks and financial institutions.
In May 2021, ComplyAdvantage extended Series C Round To USD70 million with New Goldman Sachs Investment (9). It is a global Regtech company that provides regulatory reporting Regtech solutions transforming financial crime detection.
Most of the existing successful Regtech start-ups nowadays are mainly American, European or Israeli companies. However, the Asia-Pacific region is expected to catch up to Regtech growth and innovation in the future. Singapore is taking the lead in regulatory technology in the Asia-Pacific region. Singapore start-ups had tremendous support from the government and the main regulator. Singapore puts proactive efforts to shape the market and enable the Regtech landscape to mature. Capturing the Regtech trend, the Hong Kong Monetary Authority (HKMA) launched a new Regtech Adoption Practice Guide series in Jun 2021 to provide banks with detailed practical guidance on the implementation of Regtech solutions. Hopefully, the improvement of the Regtech ecosystem driven by government policy can help to nurture more more successful Regtech start-ups in the region!
(1) PRNewswire, SEP 2021
(2) 2021 Community Bank CEO Outlook Survey
(3)Deloitte Regtech Universe 2021
(4) Fintech Global, 2021
(5) Bloomberg, Aug 21
(6)Teachcrunch, Jul 21
(7)Fintech global, Sep 21
(8)The Block, Apr 21
(9)Businesswire, May 21
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