The number of global regtech deals rose to a new high in 2019, despite a drop in total regtech investment. This reflects an increasing interest in regtech with relatively modest deal sizes given it is still a maturing area of fintech.
Regtech is an intriguing arena, given pure-play solutions are not abounding as investment or acquisition targets. However, benefiting somewhat from the macro drivers spurring the rise of investment in cybersecurity in fintech, regtech has seen remarkably steady activity at an elevated level in the past 3 years, although deal value can remain quite variable. The increasingly complexifying regulatory landscape across developed markets spurs further interest in automation of compliance, risk monitoring and more.
There is not a one-size-fits-all solution for regtech in the market at present. Because of this, a number of traditional financial institutions drive innovation by investing internally in machine learning, AI and other digital technologies. This is especially the case for financial institutions’ efforts to elevate the customer experience, to strengthen risk management, such as credit risk modelling, credit monitoring systems, fraud detection and prevention, and to improve financial forecasting, such as financial modeling, ALM, pricing and P&L evaluation.
The increasing focus on regtech over the past couple of years has been partly driven by the implementation of General Data Protection Regulation (GDPR) and the second Payment Services Directive (PSD2) in Europe and, more recently, by the California Consumer Privacy Act (CCPA). The full impact of these regulations has yet to be truly understood, however, with the CCPA coming into force in 2020 and the deadline for e-commerce card-based transactions in the EU to comply with PSD2’s strong customer authentication requirement extended to 31 December, 2020.
Looking forward to 2020, a number of elements will continue to drive interest and investment in regtech, including more focus on consumer protection and data security, the enrichment of the regulatory landscape in different jurisdictions, digital transformation within financial institutions, and the success stories of regtechs as they begin to scale and grow.