As with all markets, the RegTech market comprises buyers and sellers – buyers being the regulated institutions dealing with the challenges of ever-increasing regulation and the sellers are the RegTech vendors, offering innovative technological solutions to help regulated firms meet those challenges. Sitting between both sides of the market, here at RegTech Associates we are able to observe first hand some of the issues that can contribute to the lack of adoption of RegTech, despite the plethora of excellent products and a willingness on the part of financial firms to explore their possibilities.
Often, discussions regarding the adoption of innovative technology by large firms focus on the barriers put in the way of early-stage, agile, small vendors by these firms – long procurement cycles, hundred-page information security questionnaires, difficulty navigating organizational behemoths and the challenge of integrating with legacy systems. Whilst we don’t deny that these are very real issues for RegTech vendors, we also see the problems that regulated firms have in navigating what we have taken to calling the ‘fog of innovation’.
We know there are at least 500 different technology products that help solve regulatory needs as we track them as part of our RegTech Directory – these products span ten different regulatory categories and use combinations of innovative technology such as machine learning, digital ledger technology, big data analytics and are typically cloud-based, SAAS offerings.
With such a volume of products to choose from, it can be very hard for regulated firms to pin-point the one which will solve their specific problem or set of problems. In some cases, that sector of the market might be quite crowded (such as Financial Crime). In others, some vendors may not have a clear or detailed understanding of the regulated institutions’ needs and as a result, may overstate their capabilities. This can then ratchet up the expectations of what RegTech can do, the problems it can solve and the ease with which it can do so. In parallel, the needs of regulated organizations evolve because the broader regulatory environment is in a continual state of flux.
Given the dynamic of unrealistic expectations and a fast moving market, it is easy to see how mistrust between buyers and sellers can arise, with buyers expressing dissatisfaction, prolonging sales cycles and further slowing down the adoption of innovative regulatory technology. Ultimately, for both the regulated firms and the RegTech vendors, this keeps costs high, efficiency low and regulatory risks of all flavours are not being effectively managed.
How can we solve this problem?
Arguably, the RegTech industry will be unable to sustain this many vendors over the long term. It is unlikely that over 500 vendors will all have the capability and resources to achieve the scale necessary to serve enterprise needs and repeatedly convert proof of concept revenue to recurring production contracts. One inevitable response to this will be market consolidation – through mergers and acquisitions and through some unlucky firms falling by the wayside.
The risk involved with this response is that smaller, more nimble and innovative firms will get swallowed up by the large incumbents, with the potential consequence that innovation will be stifled, complacency will set in and product development in response to customer feedback will be sacrificed.
An alternative response – and one that has a more hopeful outcome – is consolidation through partnerships, with the aim being to integrate the best of breed RegTech solutions as part of a platform led approach. What this means in practice is instead of trying to bring together a number of vendors and asking them to integrate their solutions, instead, firms utilise technology that allows these vendors to plug and play, creating something of an internal ecosystem.
Two categories where we see a really dense fog of innovation are financial crime and regulatory change which, when combined, comprise over 200 vendors.
We also believe that these are two areas that lend themselves to the integration of a number of market-leading RegTech products across platform technology, each providing an innovative, cost-saving and agile solution that join together seamlessly at enterprise scale. We are actively working with some of our clients on this proposition to solve the challenges of managing regulatory change across a financial institution.
Of course, identifying the best RegTech products in the first place still requires firms to navigate the fog of innovation. RegTech Associates is always happy to help – so check out our RegTech Directory or contact us if you have a more specific query.