(7 min read)
“RegTech is no longer just for early adopters. We’re starting to see the actual, tangible benefit these technologies can provide.” -Brian Clark, CEO, Ascent
2020 is set to be a big year for the RegTech industry, and the start of an even bigger decade. We’ve seen a significant investment in the RegTech space over the last handful of years, galvanized by the technological advancements that now allow RegTech to solve real problems for Compliance and Risk teams, saving them money and time and reducing risk in the process.
Now on the doorstep of the new decade, we wanted to take a moment to look back briefly at some of the trends we saw in 2019 and peek into our crystal ball as we make a few predictions about the year ahead.
Trends We Saw in 2019
RegTech has crossed the chasm. Last year was the year that RegTech stopped being a thing that was going to happen and started being a thing that was happening. Companies moved past pilots and out of the innovation phase and began operationalizing benefits in a production environment. As Ascent Founder and CEO Brian Clark put it, “RegTech is no longer just for early adopters. We’re starting to see the actual, tangible benefit these technologies can provide.”
The wheat started separating from the chaff. As part of that evolution out of the innovation phase, RegTech ventures either found and connected up with a market demand — or they didn’t. And with those that didn’t, we started to see the first handful of failures. Ultimately, this will be good for financial institutions as it will make it easier to identify which companies are truly creating value.
Regulators went on the record about RegTech. This year we also started to see regulators asking firms what they’re doing to leverage RegTech. This is obviously an exciting theme for the RegTech industry, but it’s also exciting for financial institutions. As regulators embrace technology as a viable solution, it should help give Risk and Compliance teams a path forward through the growing and increasingly dangerous regulatory maze. Speaking of . . .
Pressures to comply only increased. Unsurprisingly (and unpleasantly), we only saw more enforcement actions with higher regulatory fines, creating more pressure on Risk and Compliance teams. The FCA kicked off 2019 by levying its largest personal fine ever and ended up filing 160 enforcement actions before the year was over. Not to be outdone, the SEC published a whopping 2,754 enforcement actions this year alone, including 95 against public companies — the highest number in a decade. Just as unsurprisingly: this isn’t a trend we expect to dissipate anytime soon.
The marketplace became even more global. And, because of this, regulations and privacy legislation became more global too. This means that companies operating in international markets have yet more rules and regulations they’re required to be in compliance with. We discuss more below as, like the others above, we don’t think this one is going away any time soon.
Trends We Expect to See in 2020 in the RegTech Industry
Operationalizing will be the name of the game. Moving out of the innovation phase, it will be key for RegTech ventures to lock down operationalizing and scale so that they can answer the very important question they keep hearing from financial institutions: “Can you prove to me this thing actually works?”
We’ll likely see still more investment, but done thoughtfully. In the first 3 quarters of 2019 alone, investment in the RegTech space grew by 103%. We expect we’ll continue to see more funding, but it will be of the middle-stage, thoughtful kind. Now that the ideas are out on the table, investors will be looking to find companies that are demonstrating product fit by acquiring more customers. This will be a tell-tale sign for financial institutions, too, as they evaluate potential solutions.
Look out for a burgeoning ecosystem. As RegTech separates further from FinTech and truly becomes its own industry, we expect to see additional technologies and ventures popping up to create a supportive ecosystem. Financial institutions should keep an eye out for things like consultancies, which can help them evaluate and implement RegTech solutions, and complementary tech like open APIs, which would allow them to plug new solutions into existing systems.
. . . in Financial Services
Brace for the crunch. Increasing cost pressures on both the buy and sell side, shrinking margins, the rise of formidable FinTech and challenger banks — all of these factors are likely to continue, further driving the consolidation trend we’ve seen recently and helping firms realize that, for some of these obstacles, technology offers the only viable route forward.
Increased globalization means increased risk. We expect this trend from 2019 to only get more prevalent and more dangerous. Think of it as a simple risk array: Firms are operating in more marketplaces doing more things with increasingly larger penalties — and they’re doing it with the same amount of staff. They can scale up personnel until payroll begins to buckle, or they can turn to technology.
. . . from Regulators
Big topics will get a lot of attention. Privacy, cybersecurity, and cryptocurrency are all major themes we expect to see regulators continue to focus on in 2020. Additionally, other headline-makers like Brexit will likely cause a lot of activity. And the looming recession(s), if actualized, would kick off more action by central banks, more uncertainty, and a lot more work for regulatory compliance.
No appetite for keeping quiet. The above themes and others seem to be in the news on a near daily basis, giving regulators not just an incentive but a public mandate to become increasingly effective. This comes with the need to be stronger in enforcement actions, one contributor to some of those major fines we’ve seen recently.
Jurisdictional arbitrage is no more. The days when you could choose your jurisdiction according to a region’s regulatory policies are largely over. The globalization of the marketplace means that more financial institutions (including many SMEs) are operating in multiple countries, and so they’re forced to abide by all of the regulatory bodies governing those countries. Compliance and Risk teams are then given the mammoth task of somehow knowing all those rules, keeping up to date on them, and following them — which, for simplicity’s sake, often means universally abiding by the strictest.
Expect collaboration — but not cohesion — among regulators. While we have seen regulators working together to find and implement technology solutions, don’t expect to see cohesion across their requirements. Even as the marketplace becomes increasingly global, each regulator will have to abide by its own government mandate. After all, they don’t serve the financial institutions they audit but the consumers of their respective jurisdictions. Ultimately, there’s only one way to reconcile the differences between regulatory requirements — via technology.
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What Ascent is Excited about in 2020
Just as 2020 is shaping up to be a big year for RegTech as an industry, it’s looking to be another banner year for Ascent. Here are just a few of the opportunities that have us excited to tackle the new year:
- We were thrilled to be selected by the Global Financial Innovation Network (GFIN) to pursue a cross-border pilot earlier this year. We believe the opportunity to collaborate directly with regulators could create value for the entire market, helping firms to operate more efficiently and to reduce costs while consumers are better protected. We’re excited to see what the future holds for this initiative.
- Speaking of excited, we recently raise $19.3 million in our Series B funding round. This investment will empower us to scale and further operationalize our business, and it will be nothing short of fundamental in advancing our mission to reduce the cost of compliance and protect the rule of law. We can’t wait to put the funding to work in the year ahead.
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