Federal deregulation and increased international competition are all factors that could push US RegTech down from the throne. Or are they?
North American RegTech is dominating the global industry. Since the sector was first defined in the aftermath of the financial crisis, the US has attracted the majority of the investment injected into the industry. Between 2015 and 2019, North American RegTech companies attracted between 52.2% and 65.7% of the money being injected into it.
“[A] desire to facilitate compliance with US state privacy regimes like CCPA as well as the migration of retail banking to digital platforms and the need to supervise and report on everything from collaboration application communications to aggregated trading data [have made the US the leader],” said Marc Gilman, general counsel and VP of compliance at Theta Lake, the RegTech startup.
However, between 2015 and 2018 the rest of the world started to catch up, with North American investment shrinking from 65.7% to 51.2% of the global total in that period. European investment grew during the same period from 26.2% to 34.8% of the global total investment made. North American investment snapped back in 2019 to attracting 63.4% of the funding raised.
Yet, the slump highlights the fact that new RegTech hotbeds are emerging across the world. “The ASIC in Australia appear very interested in RegTech as demonstrated by their symposium on voice recording analytics and the select committee they’ve convened around the industry,” said Gilman.
The Australian senate launched the select committee in question in October 2019. Its goal was to find out what the state of the RegTech in the country looked like and how the government could support it. Industry stakeholders welcomed the initiative.
“The MAS in Singapore also is very engaged, particularly in the payments and digital currency space,” continued Gilman.
That being said, he does not see it as necessarily detrimental to the sector. “I think global diversity is good for RegTech – using technology to solve thorny regulatory problems across the board from access to capital to making markets safer and more transparent to regulatory compliance are all worthwhile goals, wherever you’re located,” he said. “There’s room for everyone.”
That by no means that US RegTech firms are not facing challenges. For instance, president Donald Trump has announced that he is deregulating the financial market. For instance, he has rolled back some of the provisions of the Dodd-Frank act.
“What we’re seeing in the US is a proliferation of legislation in the states as deregulation happens at the federal level,” said Gilman. “Privacy rules in California and Nevada in combination with enhanced data security requirements for insurance and financial services in New York, South Carolina, Ohio, Connecticut and elsewhere demonstrate that certain issues will continue to have legislative traction.
“RegTechs are cropping up to facilitate compliance with these rules by, for example, facilitating the comprehensive review of collaboration content from platforms like Zoom, Cisco Webex and Microsoft Teams to assess regulatory risk and data leakage. We’ll continue to see the development of interesting applications to manage privacy and data security issues. RegTechs have not been deterred by deregulation at the Federal level.”
Gilman continued, “At a high level, regulatory uncertainty—whether it is interpretation of existing law, or new legislation—will keep RegTechs and the industry alert. Doing further coalition building by bringing together RegTechs, regulators, and financial services firms is a great opportunity. Increased collaboration on practical challenges and how RegTechs can help firms solve those problems with input about expectations from regulators would be welcomed in 2020.”
Yet, Gilman is not worried about the state of US RegTech. “I believe there is still space for new RegTech companies,” he said. “Whether expanding their remit to regulatory problems outside the USor finding ways to improve on existing solutions, there are tons of areas where RegTech can continue to grow. I’m not sure I buy into the idea that saturation or multiple competitors in a space stifles innovation, on the contrary, I think it might open up an area to new ways of thinking.”
He concluded, “I think we’re turning the corner on the idea that technology can solve every problem. At Theta Lake, we’re very focused on using technology to supplement what were previously manual supervisory processes to make them more efficient and consistent. This notion – that technology is an enabler and facilitates better human decision-making – is really important. What’s interesting about RegTech is that there are so many different types of problems it can be applied to from retail banking to communications supervision, financial crime and beyond.”
Copyright © 2018 RegTech Analyst
