The COVID-19 pandemic has presented the RegTech community with both challenges and opportunities.
It’s easy to see how society has changed over the past five months since the coronavirus pandemic started in China. Businesses have sent home their employees or been forced to shut down, countries have been locked down and hundreds of thousands of people around the globe have died as a consequence of catching the virus.
The RegTech sector is not immune to the fallout and is certain to feel the effects of the pandemic in the months, if not years, to come. At a glance, there are three ways that the sector could be affected by the contagion: in funding, by changes in how people work and through regulations.
Let’s start with funding. The RegTech sector has made impressive gains over the past five years in terms of the cash it has managed to attract. Back in 2015, the global sector attracted $777.3m of investment in total, according to FinTech Global’s research. Fast-forward to 2019 and that figure had skyrocketed to $7.16bn. Looking at the first quarter of 2020, it seemed like this year had the promise of becoming another record year, with investors injecting $2.36bn into the industry between January and March.
However, while this may tempt some people to say that the RegTech sector is immune to the virus, there are a few things to consider first. To begin with, many of the deals announced in the first quarter had been in the pipeline for some time. While they may have been reported between January and March, a lot of them had already been closed at the end of 2019.
A second thing to consider is that North American RegTech companies have led the way when it comes to investment. In the past five years, the continent has been the end destination of 65.6% of the industry’s investment, according to RegTech Analyst research. The region has been followed by Asia that attracted 17.1% and Europe that could say the same for about 13.2% of the total funding since 2015. Given both North America and Europe only started to really feel the brunt of the virus at the end of February, it may be expected that they managed to close several rounds that will be announced in the second quarter.
That being said, investors are usually less inclined to invest money in untested startups during market slowdowns. As FinTech Global has reported in the past, new startups are likely to struggle to raise new capital or to do it at the good terms they enjoyed before the global crisis.
On the other side of the spectrum, companies that were looking to go public in 2020 are probably less likely to go for an initial public offering when the market conditions are what they are. Still, investors could keep investing in the mid-range startups that they have already backed because they are tested and because the investors need to protect their investments. Nevertheless, funding is certainly going to be impacted by the crisis, but how much is anyone’s guess.
After several months of lockdown and social distancing, millions of professionals around the globe have become accustomed to working remotely. So have their employers, who many believe will be more open to the idea of their workers completing their tasks from home if they can in the future. Facebook, Twitter and Square are three examples of major companies that announced that they plan on making remote working from home permanent for their employees who are able to work from home. Many are set to follow.
“This will be an electric shock to the system,” Paul Daugherty, chief technology officer for consulting firm Accenture, recently told the Wall Street Journal. “Companies are on the hook to rethink the work experience, and the work tools, for their cocooning employees.”
For many, this could mean less stress and time wasted on their commute, having to deal with colleagues cooking fish or accidentally burning plastic in the lunch room microwaves, or other small irritants people have learned to expect in their professional lives.
However, a growing acceptance could also create both challenges and opportunities for RegTech companies. For starters, companies like Theta Lake and Arctic Intelligence have all sent their employees home since the virus broke out. Of course this means they have to face the challenges of managing a remote workforce.
Yet, it also present the industry with some opportunites. Over the past three, four months a lot of us have become extremely familiar with Zoom, Skype, Hangouts, FaceTime and many other video conferencing apps. Conducting these calls via these services means more compliance obligations must be met. The must comply with the regulations in a wide range of laws such the Dodd- Frank, PCI-DSS, the EU’s Markets in Financial Instruments Directive (MiFID II) and privacy laws like the General Data Protection Regulation (GDPR).
Similarly, remote working could also create an opportunity for cybersecurity startups. This segment has been one of the biggest beneficiaries of investment in the industry for years. In 2018 it attracted 20.7% of all the investment and in 2019 that figure jumped to 37.2%, according to RegTech Analyst’s research. The compliance management and the identity verification sector respectively attracted 18% and 13.6% of the total RegTech funding.
This segment of the RegTech industry could benefit from people working from home as remote working also comes with a higher risk of the company suffering a cyberattack. The attack surface is bigger and many people may not have the same strict digital defences at home as they would have in the office.
Since the outbreak, cyber criminals have tried to leverage the pandemic to launch phishing, ransomware and other forms of hack attacks. So there could be an opportunity for cybersecurity companies to leverage this growing demand.
Since the Great Recession of 2008, financial services firms have faced growing regulatory pressure as lawmakers around the world have clamoured to create more market stability. In many ways, that crisis was one of the leading factors behind the rise of RegTech as an industry to begin with.
This crisis could have a similar effect. During the crisis, regulators around the world have launched several initiatives to protect the stability of the markets. In Singapore, the Ministry of Finance (MOF), the Inland Revenue Authority of Singapore (IRAS), and the Monetary Authority of Singapore (MAS) unveiled measures in April to give investors more flexibility. In Europe, regulators banned short-selling at the beginning of the crisis, restrictions that may soon be lifted. In Australia, ASIC also softened investment rules. Add to that the national regulators that have delayed the reporting deadlines for the companies that they cover and it’s easy to see that there has been no shortage of measures put in place to protect the market.
These rapid changes highlight how quickly regulations can change which in turn demonstrate that having digital solutions in place to meet the changing compliance obligations may be a good idea. Again, this is an opportunity RegTech companies could capitalise on.
So there are certainly many challenges, but play your cards right and there are absolutely opportunities out there too.
Copyright © 2018 RegTech Analyst