A perfect storm for RegTech

The global RegTech market is estimated to be worth around USD2bn in 2018 and according to this is set to hit over USD7bn in five years’ time. This works out to a CAGR of over 25%.

By comparison, the global FinTech market is only set to grow by 7% in over the next four years. Clearly the total value of the FinTech market dwarfs that of the RegTech market and has an effect on CAGR but this growth trend is undeniable.

Driven by increasingly strict and more frequent regulation, the sector has the potential to not just become the next FinTech growth sector but to develop as a sector in its own right. Challenges abound however; Business Insider highlights that although the number of RegTech companies is increasing, they are struggling to scale. However, as pointed out by JWG this looks set to change:

“There are five forces at play in 2018:

  1. Implementation costs will continue beyond deadlines.
  2. Data and collaboration to drive RegTech market boom.
  3. The price of stopping crime.
  4. Enhanced surveillance of cyber risk.
  5. Regulatory convergence and divergence”

Clearly the continued implementation of technology solutions to cope with regulations such as PSD2, AMLD5 and MiFID II will be a huge driver of continued RegTech expansion.

GDPR has placed a huge burden on firms, not just in the financial services space, to manage, control and secure user data. Separate regulations – in particular the ones mentioned previously – have also forced firms to collect and store more data than they have in the past. PSD2 creates a situation where firms are being forced to collect more data, allow third parties unfettered access and then face the potential of crippling fines if this is not managed properly.

This has a knock on effect on the price of stopping crime. We’re already seeing record AML pay outs – most recently ING. If this is a taste of things to come, then firms will be looking to ensure that they are not the next record breaker.

The threat of cybercrime is not set to diminish any time soon. With the number of attacks on the rise across the globe, the constant battle to stay one step ahead of criminals will provide ample opportunities for RegTech companies.

Looking further into the future, regulatory convergence or divergence will be increasingly important as the terms of the UK’s exit from the EU become clearer.

This all paints a picture of a sector on the verge of an explosive phase of growth, and not just limited to the financial services sector – the factors discussed above apply to any regulated business. The problem of scale seems to have been solved.

Making hay while the sun shines

While the raw ingredients for a period of stellar growth are present, actually cooking up something palatable is a different story altogether. Looking back at Business Insider’s findings that the number of companies is set to increase as much as 23% shows us that while opportunities abound, competition will be fierce. Those companies that are currently in the market have the advantage of solutions that, as they are already being used, will be tried and tested as well as the relationships to capitalise on this booming market.

The banking sector was ripe for disruption and regulations such as PSD2 have helped to further boost the expansion. This situation is eerily similar to that in the RegTech market. Driven by an increasingly technology-focused regulatory landscape and by regulated entities becoming less able to implement these technologies themselves, all the signs point to RegTech being the next boom sector of an already vibrant FinTech space.

It will be interesting to see how RegTech firms differentiate themselves as competition increases and how they intend to broaden their outlook beyond the financial services. It will also be interesting to see what part communication will play in explaining that differentiation to what looks set to become a very crowded space.

Written by Daniel Lowther


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