RegTechs and banks: partnering to improve the status quo
The RegTech industry is growing at a prolific rate. In the last 12 months, over $1.2 billion has been invested in the industry. The RegTech market is expected to grow at an annualised growth rate of ~25% between now and 2023.
Yet, the RegTech landscape remains fragmented. Hundreds of smaller RegTech firms developing their own unique regulatory solutions adds complications for financial institutions who want to embrace cutting-edge technology to streamline compliance.
Banks are struggling to know where to start. As a result, the procurement is time-consuming and inefficient.
So, what is the solution? What should banks be looking for when exploring RegTech?
Our FinTech Connect session earlier this month aimed to explore this, with Carrie Osman, CEO of Cruxy & Company, Evgeny Likhoded, CEO of ClauseMatch, and Alex Barkley, Head of FinTech Procurement at HSBC, all sharing their pointed views on the topic.
The status quo: fragmentation in regulation goes both ways
In Q3 2018, about $400 million was invested in RegTechs. Investors are pouring money into this space. As Carrie notes, from her strategic work with RegTechs, very few truly have product-market-fit. They do not know what problem they solve.
Constantly evolving regulation over the last 10 years has created a need for a holistic solution. Banks were forced to firefight regulations as they happen, and this led them to implement many fragmented point solutions that would address only specific parts of each regulation. Recent slight slowdown in major regulations after MiFID II and GDPR came into force, allows banks to step back and look at regulatory change holistically to find a way to address regulation pre-emptively.
RegTechs were struggling to implement a holistic global compliance platform for financial institutions. The status-quo was concentrating on a piece of the puzzle, such as “We are currently dealing with MiFID II” or “We are implementing GDPR.” This exacerbates the fragmentation.
Banks are similarly driving market fragmentation. For instance, as shown by HSBC, banks operate in most countries, with differing regulatory compliance challenges – having a single viewpoint across those and being able to look at them holistically is challenging. RegTechs need to harness this to provide a way out for the banks.
What could banks and RegTechs be doing differently to solve this problem
Many younger RegTechs are not ready to be a solution provider to a bank. To bring a solution into a bank, you need to do more than just address data privacy or security. They need to know more – how you hire people, how your physical access controls are managed, how you train employees, how you handle suppliers etc. They want control over the suppliers that are implementing solutions, which is understandable and actually required by regulation.
That’s why transparency is key in making it easier for banks and RegTechs to work together. Recently, several banks published a joint paper on how to go through procurement within a bank, aimed at FinTechs selling to banks. This could be key. As Alex Barkley outlined, the earlier RegTechs start talking to procurement, the better.
Challenger banks are clearly leading by example in their technology usage. Metro Bank have close to 1.5 million customers in the UK and employ nearly 3,000 people. In comparison, Revolut with over 3 million customers globally – only have 600 employees. These examples show that process automation is key.
Their success is only achievable by being unafraid of technology to help with automation. Applying this mindset to compliance, the landscape needs to shift from overreliance on humans. You do not want to employ 8,000 people to do compliance. In order to have this level of automation in the future, RegTech solutions need to be able to connect and talk freely to one and other. One day, perhaps we will see a truly collaborative, end-to-end compliance platform.
Alex and Evgeny were asked what they would do if they woke up tomorrow and they were the CEO of a RegTech and a bank respectively:
Alex Barkley, Head of FinTech Procurement at HSBC: “It’s all about being really clear to the bank. What are you trying to solve for the bank? Where are you able to help the bank exactly? Being able to say: “This is the one single benefit we have.” Lay it out really clearly and really simply – it would walk into the door.”
Evgeny Likhoded, CEO at ClauseMatch: “If I was to choose one thing, it would be to change the entire culture of the bank. And I don’t mean just put beautifully worded values and a mission statement on every wall. I mean truly implementing the values which drive innovation, and which drive people to try new approaches without the fear of making mistakes and failing. People wouldn’t be punished for mistakes. To drive the automation of regulatory compliance you need to improve the culture in a bank. If there was one thing I’d do, that would be it.”