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Regtech spending to triple by 2026: But are incumbents struggling to procure from startups?

Onboarding and AML tools leading the charge.

Spending on regulatory technology (regtech) will triple to $204 billion and make up more than 50% of global regulatory compliance budgets by 2026, according to Juniper Research.

Regtech spending will increase 200% from its current level of $68 billion in 2022, Juniper suggests – a CAGR of 31.6%. This is significantly higher than other market researchers are projecting.

Harshada Thok, a research analyst at Juniper Research told The Stack that the anticipated growth was being driven in large part by "ever-evolving consumer preferences and [financial services firms' need to] capitalise on the benefits of AI-based onboarding techniques" -- she added that with demonstrable fraud detection and other capabilities improving over past five years trust was growing among larger incumbents.

Whatever the growth rate, regtechs are likely to see significantly accelerated growth, thanks in part to what Suchitra Nair, partner at Deloitte’s EMEA Centre for Regulatory Strategy (speaking at the Innovate Finance Global Summit this month) called an “explosion and opening up of data” in part due to cloud migrations

Shift to cloud enables regtech spending

She noted that attitudes had changed significantly in recent years: “If I compare where incumbents were four years ago, they were trying to lock out the fintechs and build everything themselves – but now there’s a mindset shift. They’re very willing to collaborate, they don’t want to reinvent the wheel, they understand it’s much more effective and efficient to work with a fintech.

“They’ve got the cloud capability, or they’re transitioning to the cloud, which makes the plug-and-play option a lot more feasible. Whereas integrating regtech into legacy systems, and I’ve done a couple of these, is extremely expensive, because the data standardisation is really hard to do, and the mapping,” added Nair.

Juniper’s regtech spending white paper said the sector has significant potential outside regulation: “Beyond simply meeting regulatory requirements, many regtech firms enable businesses to access the ‘big data’ that holds the potential to both address many compliance concerns and provide valuable insights into their business.

“Regtech solutions can also assist firms by enabling them to access their data in a cost-effective way and identify risks, predict compliance failures and enhance coordination across their business.”

The research house is tracking 18 vendors in its "Juniper Research Competitor Leaderboard": Behavox, Chainalysis, ComplyAdvantage, Continuity, Encompass, Feedzai, Fenergo, Forter, Identitii, IDology, Moody's Corporation, Onfido, Sift, Socure, Symphony Ayasadi, Tookitaki, Trulioo, Trunomi.”

See also: WCKD RZR’s Chuck Teixeira on revolutionising data access

Juniper also believes AI within banking-as-a-service (BaaS) models will be a significant driver of the adoption of regtech, as it will help meet growing expectations from clients as well as reducing costs.

“Twenty-six percent of digital onboarding processes in the banking market will use AI systems by 2026, compared to just 8% in 2022. Beyond digital onboarding, regtech will leverage BaaS models to swiftly expand the use of AI in banking for more comprehensive tasks, such as fraud detection and mitigation,” the Juniper white paper claims.

Regulators themselves are also paying close attention to regtech spending. Last year the UK’s Financial Conduct Authority (FCA) commissioned research into the sector, and found 43% of those surveyed saw increased demand for regtech. The FCA’s survey also found 95% of businesses which use regtech were satisfied with it – although 41% also said communication from regtech firms, and integration of regtech, could be better.

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“One of the more thought-provoking conclusions and asks from the buyer side is the wish to explore a RegTech certification or accreditation scheme, an issue raised in the recent Kalifa Review of UK FinTech.

As demonstrated in other markets, such as cyber security, certifications have been successful at establishing markets and ensuring a certain level of quality of products and services,” the FCA’s article said – noting the FCA itself is unable to act as a certifying body.

One impediment to the growth of regtech is the complexity of procurement, according to Deloitte’s Nair: “I think the missing link is, how does a [large] scale incumbent effectively collaborate and enter into these legal agreements with a start-up or a fintech –  I think that’s the missing piece which needs to be developed a little bit more. The procurement teams are playing catch-up, but a lot of fintechs I speak to, they struggle to deal with the volume of terms and agreements. It’s not so much the revenue and pricing, that’s always going to be a challenge, but it’s about these terms and agreements and contracts that they need to navigate,” she said at the IFGS panel.

See: Are you using synthetic data to innovate? The markets watchdog wants to learn from your experience (so do we)