Financial fraud within institutions is a growing concern, as 80% more banks have been fined for
money laundering, costing $10.4 billion. Regulatory technology (RegTech) has become a potential solution to minimize the threat of internal and external monetary fraud. These tools also enable automated reporting, risk management, compliance management, transaction monitoring, and similar services to build and promote transparency in finance.
This article will explore what RegTech is, the market size and forecasting, the advantages and challenges of these solutions, and the leading RegTech providers in 2023.
What Is RegTech?
Regulatory technology (RegTech) refers to a collection of software companies that manage and automate regulatory compliance. Banks invest in RegTech platforms as they leverage big data and machine learning (ML) to monitor online transactions in real-time and detect irregularities or fraudulent activity within the organization.
In addition, RegTech providers often harness cloud computing, enabling them to offer these functionalities at minimal cost and with maximum efficiency. They provide these services through a Software-as-a-Service (SaaS) model and collaborate with financial firms to ensure compliance in digital payments and minimize the threat of data breaches.
RegTech Market Size
According to MarketsandMarkets, the RegTech market was worth $7.6 billion in 2021, projected to reach $19.5 billion by 2026. The report also confirms this market has a compound annual growth rate (CAGR) of 20.8%, highlighting that the US has the largest investment in RegTech. In addition, factors such as money laundering and collaborations between financial organizations are propelling the growth of RegTech.
Another report by Allied Market Research confirms that the COVID-19 pandemic fueled the
adoption of cloud technology in this sector. This research also reveals that while small and medium enterprises have extended into this market, large organizations remain the primary clientele. Anti-money laundering (AML), fraud management, regulatory reporting, and risk and compliance management are the top use cases among these businesses.
Overall, the RegTech market demonstrates promising growth for the following years, driven by advancements in financial fraud. The following section will explore the many advantages of these solutions.
RegTech offers significant advantages for financial organizations including improved risk management, minimized expenses, and optimized customer experience. Let’s discuss each of these benefits and what they mean for businesses.
Improved Risk Management
Through cloud computing, ML, and big data, RegTech platforms make risk management much more accurate, efficient, and easier. Banks can rely on real-time monitoring and automation to detect and report anomalies in financial transactions. RegTech can also identify system vulnerabilities and provide warning signals to help institutions protect themselves from data breaches, money laundering, and similar fraudulent activities.
RegTech platforms require significant maintenance costs (which we will explore further below), but money laundering and financial fraud come at a much higher expense. In fact, according to data from Persona, a money laundering case involving Wachovia Bank cost the organization $380 billion. The same research also confirms that Capital One had to pay a fine of $390 billion for poor financial reporting. Based on the cost of financial fraud and neglecting compliance regulations, banks must prioritize RegTech to minimize these challenges.
Optimized Customer Experience
A third advantage of RegTech is optimized customer experience. As these platforms allow financial organizations to reduce the time and effort spent on compliance and monitoring digital transactions, they can focus on delivering improved customer support. Digital payments will be more secure and easier for consumers, which can lead to increased efficiency and satisfaction.
The primary challenges of RegTech include differing regulations and compliance requirements among different countries, as well as excessive maintenance costs. Another limitation of these technologies is the lack of data standardization among firms and agencies. In this section, we will provide an overview of these challenges and how they impact institutions.
Differing Global Regulations and Compliance
One of the most apparent challenges of RegTech is the difference in laws and regulations between countries. While most platforms focus on unifying financial compliance automation and management, providers must consider specific laws based on the location of financial intuitions. For instance, the Dodd-Frank Act governs US banks, while European firms must adhere to the MiFID II regulations. In addition, organizations must ensure RegTech companies they work with understand and have experience managing their specific frameworks.
Software Maintenance Costs
According to the same report by MarketsandMarkets, the cost of software maintenance is a restraint of RegTech. 70% of the total cost of RegTech per bank is for maintaining and updating these systems. While the development expenses may not be high, maintenance can be 3 times more expensive. Consequently, large financial institutions may be the primary target audience in this sector, as smaller businesses lack the resources, expenditures, or infrastructure to support RegTech.
Lack of Data Standardization
In addition, this MarketsandMarkets research confirms the lack of data standardization among organizations. RegTech relies on high-quality data to produce valuable results, and not every institution can provide such data. Reporting is also challenging to compare, as agencies and firms have not employed standard formats or methods to collect and analyze data. To produce the efficacy of RegTech, institutions need to collaborate on data standardization solutions that specifically address these challenges.
The Leading RegTech Companies
The RegTech100 is the most recent list of 100 of the most innovative RegTech providers globally. To make the final selection of these platforms, the Advisory Board and FinTech Global team exercised the following criteria:
- Business growth is determined by capital raised, revenue, and customer traction.
- The industry significance of the problem the company solves.
- How the company impacts the value chain or revenue for its clients.
- The innovation of the technology solutions offered.
- How critical would it be for financial organizations to collaborate with this company?
Applying these criteria enabled the Advisory Board and FinTech Global team to evaluate the top 100 RegTech companies in 2023. Here are a few of the first companies this report mentioned.
This RegTech vendor provides cyber and information security, reporting, risk management, and 3rd party vendor management. This software aims to simplify auditing, compliance, and risk management through AI, enabling transparent relationships between advisors and businesses. 6clicks operates in various regions, including the US, the UK, and Australia.
Alessa focuses on a much broader scope than the previous agency, providing solutions for onboarding verification, risk management, transaction monitoring, and reporting. In addition, this company manages sanctions and watch list screening, investigation workflows, and compliance management. Operating in the US, Canada, the UK, Australia, and Latin America, among other locations, Alessa can support compliance and regulation in various industries and applications.
This RegTech company develops regulatory technology offering end-to-end automation for risk management, transaction monitoring, reporting, and compliance management. As AQMetrics found that manual reporting was slow, inaccurate, and inefficient, they designed RegTech solutions to combat these challenges and streamline reporting and compliance. This provider’s regions of operation include the US, the UK, and Europe.
RegTech refers to technology solutions used to automate and manage compliance and online transactions within banks and similar financial institutions. Large organizations invest in these platforms for improved risk management, reduced expenses, and improved customer experience. On the other hand, there are limitations to consider, such as differing regulations and standards between countries, significant maintenance costs, and a lack of data standardization among banks to ensure consistent, high-quality data.
However, if businesses can find tailored solutions to solve these challenges, they can protect their data from financial fraud and ensure internal transparency. To achieve this, organizations should consider any of the top RegTech providers in the RegTech100 list, naming the most innovative companies in 2023.