Blockchain chronicle. The regtech sector, which uses technology to improve compliance for banks and financial players, is booming.
A simple Google search of the term “fintech” results in over 80 million hits. While this neologism of finance and technology has been in the financial glossary for many years, few would imagine that it is older than the internet.
The first use of the word fintech dates back almost 50 years, to 1972 in the pages of the business magazine Interfaces. Abraham Leon Bettinger, vice-president of the American bank Manufacturers Hanover Trust Company, wrote an article entitled “Fintech: a series of 40 timeshare models used at Manufacturers Hanover Trust Company”. Of course, it was not until the 2000s and the rise of financial startups that the term was democratised, and more particularly in 2015 according to KPMG, the year in which more than $47 billion was raised in this sector, which is now a must.
More recent and less well known than its big brother, the word regtech (3 million Google hits against 80 million for fintech) is gaining momentum this year. This neologism designating fintechs specialising in solutions using data in compliance with new legal requirements is expanding.
The Regtech study conducted by Sia Partners and AEC Fintech1 in 2018 on 80 European regtechs stated that 86% of them were created after 2008. More recently, in June 2021, Deloitte2 examined the issue through a listing of nearly 440 companies active in the field. According to the latter, 181 are active in compliance, 91 in identity management and control, 72 in reporting, 59 in risk management and only 36 in transaction monitoring. The technologies used are in the order of seven with APIs (Application Program Interface), Big Data, Blockchain, cloud computing, robotics, smart contracts and voice or text recognition technologies.
Blockchain-based regtech solutions offer an effective tool for companies in their efforts to comply with tax regulations, for example.
Among these, one technology in particular is driving the sector: blockchain. Blockchain-based regtech solutions offer an effective tool for companies in their efforts to comply with tax regulations, for example. The immutable nature of this technology ensures the accuracy of these records, allowing it to be used as a supporting document for returns filed by organisations with the relevant tax authorities.
This technological innovation will continue to grow as regulations evolve and regulatory expectations increase. Blockchain addresses critical issues for financial institutions, which are forced to comply with complex anti-money laundering and KYC regulations. As the banking sector has been particularly impacted by these changes in recent years, the relevance of blockchain as a core technology in regtechs is increasing.
In Switzerland, several startups have developed regtech solutions based on blockchain. For example, Zurich-based Indagia is developing a software solution that uses machine learning as well as blockchain to enable financial auditors and accountants to work more efficiently by capturing all data from receipts and invoices and automatically processing them for accounting.
Another example is Wecan Group and its Wecan Comply solutions for custodian banks and independent asset managers, or Wecan Act, a collaboration between public institutions and cantonal notary chambers. This solution enables the exchange of data between notaries and public registries. Both software packages are also built on the blockchain in order to guarantee the immutability, traceability and time-stamping of data.
The regtech field is gaining momentum that has not gone unnoticed by investors.
Regtech is also gaining momentum in the field of crypto-currencies. Companies like Chainalysis, Coinfirm or KYC-Chain provide anti-money laundering software for bitcoin transactions by offering enhanced due diligence.
Another example is the Danish regtech NewBanking, which aims to enrich traditional payments on all major card schemes with KYC data and compliance information, again using blockchain.
The field of regtechs is gaining momentum that has not gone unnoticed by investors. KPMG confirms this trend. During 2020, interest in regtech solutions has exploded. Companies are striving to rapidly digitise their processes to support growing consumer demand. As a result, companies have been looking for efficient and cost-effective ways to manage the regulatory requirements for digitising their data.
This growing interest has driven funding in regtechs to US$10.6 billion for the year 2020, almost 10 times more than in 2017 when the entire market received US$1.5 billion in funding.
We might imagine that this exponential growth only reflects a growing number of investments in the sector. This is only partially true. In 2017, VC, PE and M&A investments totalling US$1.5 billion corresponded to 146 deals. In 2020, the US$10.6 billion corresponded to 191 deals. The profitability, maturity and potential of these startups is drastically increasing the valuation of the sector, to the satisfaction of early investors in Serie A and B.
Roper Technologies’ acquisition of insurance compliance software company Vertafore for US$5.3 billion in September 2020 highlights the growing importance placed on regtechs by strategic investors, as well as the increasing maturity of companies in the sector. As financial regulations increase, regtechs have many more years to go.