When investing into RegTechs, it is essential to find companies with technological expertise but also in-depth understandings of financial institutions’ processes and complexity, according to Astrid Freier CEO and co-founder Reg Tech Berlin.
RegTech might have been lagging behind compared to other areas of FinTech like payments, lending and WealthTech, but each year, appetite in the sector has been steadily increasing. Since 2014, there has been a total of $10.9bn invested in the space, and both the number of deals and volume of capital invested has been increasing each year, according to data by RegTech Analyst. There was $4.4bn invested in 2018 which marked a 240 per cent increase on the $1.8bn raised during 2017 – quarter one of 2019 has already seen $1.3bn deployed to RegTechs.
While the amount of deals has been increasing, it has not witnessed the same sharp rise. In 2017 there were 161 transactions while 2018 saw 164. Deal numbers may not be rising but it’s clear the size of them are. With so many opportunities in the market and the sheer amount of funds being flooded into the market, it can be hard for investors and financial institutions to identify what the best solutions are. Reg Tech Berlin CEO and co-founder Astrid Freier believes that it is crucial to identify a company which has great technology but also holds “very intimate understanding of financial institutions.”
She added, “In other areas, you can identify a market and a solution gap and then really invent something very new and revolutionary. But, if you want to help banks comply with their regulatory standards, not only would you have to be good in the technology you offer, but you really have to be good in the processes. This makes a difference. As an investor I would always look at how many people I see with excellent knowledge in automation, machine learning, and AI, but also how deep and profound their knowledge of a bank’s requirements are. This is a big differentiator. You have to build up a very diverse team with people from the data side, you have to have a good understanding of the respective requirements and you have to have a good understanding of the process landscape around.”
RegTech is an expert field, Freier stated. It’s a space which needs diversification in teams, so that they can build a solution but are fully aware of the nitty-gritty which goes on within banks. Regulations, which seem to be swamping the market of late, are littered with complex protocols and concepts that can be missed or even misunderstood. There needs to be people involved with the technology building that are fully aware of the intricate workings of the regulation, but of also how the financial institutions may struggle or challenges they would face using the RegTech. Whether it goes against their ethical perspectives or if it would be hindered by legacy systems. All of these are potential uncertainties that could stop an institution buying a solution.
Being appealing to financial institutions is the only real goal of RegTech and so they need to boost their appeal any way they can. Having strong technology and knowledge teams is key to designing a solution from scratch, but Freier believes that the financial services industry can look into other sectors and take inspiration from them.
For example, the pharmaceuticals space is also heavily regulated and while many of these burdens will differ to financial institutions, some of them will be the same. Even some of the ones which around completely different aspects might be similar in their core principles.
Freier said, “Pharma has a lot of reporting burdens, for example, so how could these tools also improve life in financial institutions? This is one of the beauties I see with regulatory technology. It’s not limited to one industry because you have a base technology for the future. All sectors question how we manage the flows of data and how do we get the right conclusions out of this big load of data. that’s why I believe it’s not only a topic for financial institutions.
She continued, “I think RegTech is a base technology which you can apply to a lot of other industries as well. And I’m very curious to see where one of the big solutions will come from and it may not necessarily come from banking, but the spill over we have in banking, will be enormous because this is still a very affluent and important industry globally.”
This sense of base technology can be extended further to solutions across geographies, Freier stated. Independent of the sector, many – if not most – organisations face the challenge how to improve the access to data. It’s hard to build a regulatory solution which spans multiple regions without needing a little bit of tinkering, even across Europe where some regulations are uniform. The problem is, many countries have different legislations and added parts of regulations which all need to be addressed or accounted for. But for data improvement, it gives way for a solution that could be deployed for multiple regions. This would be a great benefit applicable across industries
“I think the further we go down the road, the easier it will be to find a more ‘European solution’ which is accessible for several banks throughout Europe, and not only on an individual country specific basis. There’s a good chance that such kind of solutions will set a new standard.”
If a base technology solution like this enters the market, it would help companies to have the liberally of information they need and would support other RegTech solutions brought in for more specific regulatory requirements. It would help to solve a big problem with one solution and pave way for more tuned and tailored solutions for other specific regulatory requirements.
Opportunities of big data and AI
Big data, AI and machine learning are still the current hot topics for technology. While it seems that they are always being hailed, they have not yet witnessed their full potential. For these pieces of technology to realise their true capabilities, it really relies on the amount of data they have at their disposal and as already discussed, but financial institutions do not always have the best processes for data currently.
The global financial market has become increasingly more stringent on regulations following the financial crisis over a decade ago. Since then, more regulators have been working together and sharing more to ensure a similar thing does not happen again. While this is a good thing, it has left financial services players with more controls to monitor and more details they have, to ensure compliance. To keep up with this manually, you would need to have a lot of manpower to ensure the right datasets are being monitored and delivered. This is where technology can come in and guarantee information is shared in the correct manner.
She went on to say, “today we still have a partial technological tiredness because we have to make sure that we retrieve information from different areas of banks and consolidate them in a proper way. The consolidation of data sets has to be done with the highest level of accuracy. As long as this machinery accuracy cannot be proven in an auditable way some of the data sets will still have to be set manually and the existing infrastructure will not be able to contribute to a state of the art data management.”
AI and automation tools can be implemented to help financial services with a wide variety of the regulatory requirements. An example she gave was with identity management. There are solutions out there which are making it possible to access various types of information needed for identity, from simple information like names to even more complex data like the typical IP addresses a customer uses. Adding big data and AI to this will let businesses automatically check this information, compare it and even verify the sources.
Preventing automation and big data from succeeding are legacy systems. While solutions can make this information available, it is not always useable. It comes down to whether it can be integrated with a bank’s existing infrastructure.
“The question is, how do you now get the RegTech solutions embedded into the overall landscape of the bank’s system in place? And it is a big burden because in many cases, even if you have a good solution from outside the market, to connect this with internal information systems requires an excellent infrastructure. And this is why in Reg Tech technology, understanding of a bank’s processes and systems have to be viewed at holistically”
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