Regtech investment tops US$10 billion for the first time
During 2020, interest in regtech solutions skyrocketed as companies working to digitize processes quickly to support shifting business and consumer demands looked for efficient and cost-effective ways to manage their regulatory requirements in a shifted business environment. This growing interest drove regtech funding to US$10.6 billion, well above the previous high of US$6.5 billion seen in 2018.
Vertafore acquisition accounts for half of total funding
Roper Technologies’ US$5.3 billion acquisition of insurance compliance software company Vertafore in September highlights the increasing importance being given to regtech by strategic investors, in addition to the growing maturity of regtech companies.1
We are experiencing unprecedented levels of uncertainty. Over the last few years, companies in the financial services sector have seen regtech solutions as a means for becoming more efficient and flexible, especially when it comes to being compliant with financial regulations. COVID-19 has only increased interest in regtech by highlighting the need for companies to focus more on risk management, such as banks looking to manage their growing number of loan defaults.
Regtech becoming an important focus for financial institutions
The pandemic stressed the need for financial institutions to address structural challenges and make risk management processes more efficient and proactive. For example, loan-related risks have been growing during the pandemic both on individuals and on businesses. This, in addition to increasing regulatory demands, is driving interest in regtech solutions.
COVID-19 will likely remain an active driver for investment heading into H2’20. Regtech companies could gain traction, particularly those focused on credit-related solutions.
ESG expected to become more important component of regulation
In November, the European Banking Authority (EBA) issued a discussion paper on the incorporation of ESG factors and risks into the regulatory and supervisory framework for credit institutions and investment firms. The discussion paper identifies for the first time common definitions of ESG risks, building a common taxonomy and showing current evaluation methods. It also outlines recommendations for the incorporation of ESG risks into business strategies, governance and risk management as well as supervision. This highlights an increasing recognition of the materiality of ESG risks to investment decisions.
The EBA sees the need to enhance the incorporation of ESG risks into institutions’ business strategies and processes and proportionately incorporating them into their internal governance arrangements. This could be done by evaluating the long-term resilience of institutions’ business models, setting ESG risk-related objectives, engaging with customers and considering the development of sustainable products. Companies helping institutions to adjust the business strategy to incorporate ESG risks as drivers of prudential risks will be considered as a progressive risk management solution to mitigate the potential impact of ESG risks and will in our view drive the market.
What to watch for in 2021
- New and updated regulations related to ESG risks and capital requirements, particularly in Europe (e.g., Capital Requirements Regulation (CRR))
- The increasing materiality of data privacy, KYC, and transparency issues will drive regtech solutions
- A focus on regtech able to measure and model new risk types (e.g., climate change risk) in Financial Institution portfolios