RegTech 2017

This post was co-authored by me (Michael Meyer and Johan van der Walt). Let us know what you think.

In 2016, RegTech finally became an industry buzzword used frequently by the industry to describe the opportunity (if not the solution) to a vexingly complex topic. In 2017 we expect real and tangible action above chatter and conference banter. Below, we offer up our predictions of the five key trends of 2017 for RegTech. 

Regulator Sandboxes will create dedicated environments to test RegTech solutions (as opposed to FinTech solutions)

2016 brought about an interesting development in the FinTech space. Regulators in the UK, Singapore, and Australia created dedicated testing spaces (or Sandboxes) to experiment with emerging technologies. The Financial Conduct Authority (FCA) in the UK is the most advanced in this regard followed by the Monetary Authority of Singapore. The FCA accepted 24 companies into its initial process; 18 companies emerged from the due diligence period and are now in the testing phase. The group is a remarkably diverse set of companies, much more ambitious than we originally expected. The program will test innovative technologies across the financial services landscape with the goal of finding smart regulatory approaches to scaling them. 

Although the more conservative Regulators around the world are taking a “wait and see” attitude towards these testing programs, we expect that Sandboxes as an approach are here to stay and may even play a larger role in 2017. We are especially intrigued by “Specialty Sandboxes” that focus on specific niches within the financial services landscape. Niche segments ripe for deep testing include Blockchain, Digital Identities, and Fraud Detection. Our prediction here is that RegTech will become a very active niche for testing in 2017. In this environment we will see companies with solutions around risk data aggregation; modelling, scenario analysis and forecasting as required for stress testing; and, alternative approaches to AML/KYC/BSA to name a few. As with other domains in the FinTech space, regulatory buy-in for RegTech solutions will be imperative. Sandboxes can provide a means to that end. The more that regulators and start-ups can engage with one another, the better their joint understanding will be about ways emerging technologies can address industry problems. 

VC Funding for RegTech companies moves from ad hoc to focused investment

We know that at least 127 RegTech companies exist around the world, each in very different stages of maturation. Many of these companies are still in the seed funding stage of their lifecycle. From our research, there have been 19 Seed, 8 Series A, 6 Series B, and 5 Series C (or later) funding rounds in the RegTech space. As those seed stage companies begin to prove their product/market fit, we believe that many will be funded in 2017. The few advanced companies in the industry will seek later stage funding rounds in order to build out their management teams and technology foundations.

The RegTech ecosystem matures

The RegTech ecosystem still requires development and maturation. It is complicated network of actors that do not always have the same incentives. A good starting point for interaction would be a consistent understanding of the problem and opportunity set. We believe that a global problem statement repository should be created to frame the focus for these interactions. A broad set of stakeholders should be involved in this (e.g., Financial Institutions, Regulators, Technology Firms, Law Firms, Consulting Firms) to make sure a diverse set of ideas are covered. This will likely differ by geography but sharing ideas across geographic boundaries will be helpful to share different ways of approaching regulatory requirements via advanced technologies (“Regulations are Local. Technologies are Global”).

The ecosystem also needs regular interaction points. From conferences and hackathons to meetups and digital communities, the conversation needs to move forward. More sophisticated discussion will serve as the foundation for bringing diverse actors together. As the community grows, so will the number of companies that look to disrupt the market. We know that at least 127 exist globally today. It is not unreasonable to believe that this will grow to 200+ by this time next year. 

Integration with Incumbents

A big constraint many RegTech companies will face (as FinTech companies already do) is the ability to integrate into the environment(s) of incumbents. While Sandboxes will help to conduct virtual or simulated testing, eventually integration within the architecture of Banks will need to happen to deliver solutions. The FinTech industry has learned that next generation RegTech solutions are only as good as the technology infrastructure to deliver them. A modernized architecture is key. Technology solution providers like IBM, FIS, and Accenture will likely start looking into ways to deliver plug and play connectors for these solutions to deliver value to their clients. We will also see a greater focus on proof of concepts as a way to start small before taking on the world. 

RegTech explores immediate adjacencies

RegTech is broader than FinTech. Even though most of the focus today is on RegTech as a sub-segment of the FinTech ecosystem, it is actually a broader layer with interesting solutions also being developed for other related industries. What are the likely adjacencies? The closely integrated nature of financial services and communications technology make Information Communication Technology a logical next step. The areas of Digital Identities and Cyber Security also have relevance to the RegTech discussion. We expect that the question of adjacencies will be explored in more earnest in the next 12 months.