The potential of RegTech to surpass FinTech
By Steve Pomfret
While FinTech has been grabbing the headlines, RegTech has been quietly making strides. However, there are several reasons why we believe that RegTech could potentially surpass FinTech in size and impact.
RegTech, short for Regulatory Technology, is a term used to describe the use of technology to help companies comply with regulatory requirements. The financial sector has been the primary industry to adopt RegTech solutions, but the potential for RegTech to expand beyond this sector is immense. Below are four key reasons explaining why:
RegTech addresses the challenges faced by financial institutions and FinTech
FinTech as well as traditional financial services providers face several challenges, including regulatory uncertainty and cybersecurity risks. RegTech can help them address these challenges by providing solutions and tools for streamlining regulatory compliance and risk management. By automating core compliance processes like Anti-Money Laundering (AML) and Know Your Customer (KYC) and offering real-time monitoring, threat detection and incident response, RegTech solutions can significantly reduce administrative tasks, operating costs, and human error and financial crime risks all while ensuring adherence to regulatory requirements.
“Regulations are actually setting the tone. And what regulators really want from the industry and from the people that they regulate is greater speed and security or efficiency. Companies need to be faster, more accurate, and more resilient. So, the key reason to adopt RegTech is that regulators demand for it. Also, we work differently now - people seek more flexibility and working-from-home opportunities which might be a challenge for highly regulated financial organisations. Hence, adopting better technology to make interaction and work-from-home compliant is also a major driving force.” - Corinna Mitchell, Symphony
“Where regular RegTech can really come in is helping you manage all those different regulations on a different country basis and expand much faster.” - Edwina Johnson, Alloy
The scope of RegTech goes beyond the financial sector
While RegTech solutions are primarily used in the financial sector, they have the potential to expand beyond it. RegTech solutions can also be used in industries such as healthcare, pharmaceuticals, energy, and telecommunications, where regulations play a critical role.
For example, in the healthcare industry, RegTech solutions help companies protect patient data and comply with key regulations such as the General Data Protection Regulation (GDPR) and the Health Insurance Portability and Accountability Act (HIPAA). In the energy industry, on the other hand, RegTech allows companies to monitor their emissions and ensure that they are meeting environmental regulations like the Clean Air Act and the Clean Water Act.
RegTech facilitates ESG
ESG is another key area where RegTech can play a major role. By improving operational efficiency and internal controls and risk management, RegTech solutions can contribute to a company’s overall ESG strategy and goals, especially in the Social and Governance areas. The government has recently introduced a new act, the Economic Crime and Corporate Transparency Bill, where it's going to become illegal not to protect against fraudulent activity. So, we’re expecting to see an even higher focus on the S & G bit of ESG. Companies will then need RegTech to ensure business continuity and compliance.
“A business could receive an unlimited fine if it is found to not have reasonable fraud prevention procedures in place. This enforcement not only ensures justice is secured for victims, it also encourages companies to create an environment where it is difficult for fraudulent tactics to thrive.” - gov.uk
Investments in RegTech are on the rise
Investment in RegTech startups has been steadily increasing over the past few years. According to a report by KPMG, RegTech companies attracted US$18.6 billion in total funding in 2022 as compared to US$11.8 billion in 2021 - a clear indication of the potential of RegTech to grow and become a major player in the technology industry.
In conclusion, RegTech's potential to surpass FinTech lies in its ability to address regulatory challenges, contribute to ESG strategies, and expand its reach beyond the financial sector. The steady growth in investment for RegTech startups over the past few years further underscores its future potential. As the world becomes more regulated, the value and impact of RegTech are set to increase, quite possibly surpassing that of FinTech in the near future.