RegTechs cannot succeed if they only offer technology and no content to supplement it, according to Maria Leistner group managing director and general counsel global wealth management at UBS.
As more and more regulations are being implemented into the market, it’s clearly having an impact on the interest in RegTech solutions to help solve the compliance burdens. Funding into the sector has witnessed a colossal increase in 2018, with it already reaching 2.5-times the volume deployed in the whole of 2017, according to data by RegTech Analyst. So far this year, there has been a total $2.5bn invested into RegTech companies, compared to last year which just broke $1bn and in 2014 when just $750m was raised by the sector.
It’s not just investment firms that are responsible for the high-levels of funding, with many financial institutions getting involved as well. An example of this was the $38m funding round of Visible Alpha, a company providing analysts and fund managers with help in coping with regulatory challenges. The round was supported by a plethora of financial institutions including, UBS, Morgan Stanley, Goldman Sachs, Banco Santander, Royal Bank of Canada, and a number of others. A couple of months after this, HSBC also invested into the RegTech startup.
A major barrier for RegTechs to either be invested into or partnered with by financial institutions comes down to what they’re actually offering. The solutions that institutions are looking for are the ones that have got both the technology and the content to go with it. It’s not enough for a company to just be offering a new piece of technology, Maria Leistner said.
“Sometimes they offer the technologic solutions, but without the content necessarily. They have started to realise that this perhaps is a weakness because financial institutions would be ideally interested in both. They are teaming up now with other players, be that consultancies or advisors, in order to provide the technology plus the content. Obviously, the financial institutions are interested in both, and only want a solution that gives you the whole package, otherwise we can often develop the technology solutions ourselves.”
Financial institutions are able to develop a of software in-house and there are a lot of more competition in the market than there was around five or ten years ago. This means that RegTech companies need to listen to what it is exactly the banks are looking for and be able to provide that content along with an innovative technology process, at a good price.
She added, “It must be provided at a competitive price too because the truth is – there are many providers now. Distribution is very different than it was four or five years ago and now there are multiple providers we also can choose from.”
An increased level of competition is very much a double-edged sword, as while its great to have more technology offerings to pick from, it’s much harder to identify the right ones to partner with. There are many factors that come into play when picking the solutions, and one of the key things is whether the solution can easily be implemented as, although financial institutions are trying to simplify themselves, they are still very complex, she said.
“Some of the bigger consultancies firms are starting to support a lot of the RegTech startups and even have various environments for promoting and growing them and then they start actually working with them because they see them as a well way of ultimately getting through the objectives of being able to implement this technology solutions without dedicating internal resources to that.”
Leistner does believe that it is actually difficult for big banks and financial institutions to develop the RegTech solutions internally. It takes too much resources and time to keep up with the high-level of changes in regulations and the need to build too many different solutions all targeting various aspects. Working with other partners can actually help to develop new products, rather than going it alone, as they can provide different expertise and differing views, ensuring the best service is established.
“I think that the bigger the organization, the more difficult is to disrupt itself and even the best innovative solutions, technology or otherwise are difficult to implement. How to make it work with the existing systems. And that is actually why there is risk-based benefit in working alongside a RegTech company that develop the solutions,” she said.
As time goes on, Leistner believes there will be a drop in the market through natural selection, as it’s not sustainable for the market to be inundated. One of the troubles for the RegTechs at the moment, because there are so many, is differentiating themselves and standing out of the crowd. But as the companies either falter or work together, there could be a standardisation of the market which supports easier implementation and collaboration with other players. “We are going to see more standardised products that say the financial institutions will be using versus, people developing different things. Cost will fall down too.”
A different mentality needed?
The burden is not just on RegTechs adapting to meet the needs of financial institutions, it’s also down to the institutions to better position themselves and incorporate the tech companies. Whether these organisations can retain their positions in the market will largely depend on their scale of change and how quickly they adapt to the newer needs of the market.
Leistner said, “For me, the biggest threat, is the change of mentality in the world where the financial institutions need to reinvent themselves, and do it fast, to retain their prime positions.”
Since the financial crisis, there has been an unprecedented change to the level of regulations and legislations being implemented into the financial market. This has put growing pressures on financial institutions to meet all their various different regulations, which can include drastic changes to operations and in multiple different parts of the business. This has led to the cost of doing business to increase, while the overall margin has potentially decreased, she said.
This is why it’s important for financial institutions to change, there is a lot more competition in the market at the moment, with new players are always coming. While some of these may not be able to offer everything that a traditional financial institution can, they might have lower costs as they use technological platforms, and this will always help to attract customers. Leistner referred to a discussion she had with a CEO of a bank, which had a mentality of seeing itself as a technology company with a banking license, rather than as a bank trying to develop technology to evolve and keep up with change. This is really refreshing, a good attitude for some of the financial players to have, Leistner said, makes us believe that change is happening.
Copyright © 2018 RegTech Analyst
Copyright © 2018 RegTech Analyst
