RegTechs in 2017: The timing is right

[This post is part of a small series to be published on RegTech.]

While the category RegTech has appeared in 2015 as part of the FinTech movement, the year 2016 build the strong foundation for the RegTech community and 2017 will be defining the future of it with more companies appearing throughout the year and more solutions being adopted especially in the financial service industry.

RegTech has been seen as a subsection of FinTech but it is more than that. RegTech itself is a combination of regulatory and technology and is a abbreviation for companies that provide solutions that help companies (not exclusively Financial Services) to comply with regulations in a cheaper, more efficient and effective way through the use of (new) technology.

Right timing for RegTechs

The phenomena of RegTech is in general not new as the financial service industry has been embracing technology solutions for decades to comply with the rising number of regulations. However, the speed of implementing new technology in banks has never been the fastest, with majro regulatory implemetation projects often lasting 2 to 3 years.

With an increasing number of regulatory requirements the pace for implementing new solutions slowed even down as focus was put into compliance with regulation instead of updating the (often) old IT infrastructure. Alone the Basel III specifications of the European Banking Authority (EBA) are being estimated to be around 60,000 pages of text. For one person to read that amount it would take around 250 eight hour working days (at 2 min/page). With other equivalently important regulatory requirements such as FATCA, MiFiD II, Dodd-Frank Act, PSD 2, EMIR and many others, financial institutions are overloaded with regulations.

As cost of compliance rose exorbitantly in the past decade margins are decreasing further. JP Morgan’s stated that 43,000 of its 145,000 employees are employed to control the rest of the banks workforce. Controls cost the bank $9 billion every year.

Right now is the perfect timing for technology-first companies to provide the market with solutions that allow for cheaper, faster and easier compliance with the vast number of regulations.

Regulators interest in RegTechs

Additionally, last year was a big step for RegTech, as first regulators led by the Financial Conduct Authority (FCA) have focused intensively at providing guidance and credibility to solutions being developed by new market entrants. The attention of the regulators has brought together the solutions providers with financial service companies in the UK. The regulatory sandbox program allowed developers to develop solutions in a safe environment.

The aim of the FCA is to be the first mover in the market and by taking the leading role in the RegTech movement help to shape the guidelines by which the new entrants work and on the other hand improve the communication with financial institutions and the view of the authorities within those institutes. The main goal of financial stability can be reached easier when regulators, financial institutes and RegTechs are working together.

Outlook

In 2017 we hopefully will see more RegTechs appearing and the solutions already existing reaching a more mature state. Specialised companies will have good chances to position themselves in the market. Especially solutions offering a fast implementation will be successful while financial institutions are still fighting with huge implementation projects and have scare resources.

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