RegTech Focus: Can Technology Fix Regulation Overload?

Demand for Regulatory Technology – “RegTech”

While the complexity and pace of change of the regulatory environment is a growing pain point for most businesses, it also represents an area of opportunity for companies who provide solutions that address this problem. In addition to the hard line taken by regulators and lawmakers in areas like Privacy, companies are also worried about protecting soft targets like reputation, vulnerable to overnight takedowns in the age of social media and scandal. The above is fueling investment in technology to enhance the control environment, as more demands land on companies’ already stretched internal governance, risk and compliance functions. Indeed, the technology sector that addresses regulations, RegTech, is projected, as a whole, to grow revenues at a 20.3% Compound Annual Growth Rate (CAGR) over the next 5 years.[1]


Leaders and Trends

To keep track of a dynamic industry where many of the emerging players are startups, you have to go beyond the general business press and look to specialists who follow the sector exclusively. RegTech Analyst does a great job as that go-to resource and pulls together an annual REGTECH100[2] list that profiles notable standouts from around the world. For companies that make the list, it represents a major accomplishment and leads to heightened visibility with clients and potential acquirers. For financial services firms, one of the highly regulated industries, it serves as a shopping list to retool compliance programs with vetted and respected vendors.

I compiled the REGTECH100-2021 list in crunchbase and am publicly sharing it.[3] In reviewing this year’s list, two major themes feature prominently:

  • "Know your customer” (KYC) solutions that address Anti-Money Laundering (AML) compliance requirements for banks and other financial institutions;

  • Greater use of AI to help organizations understand regulations and digest the content of rules into actionable and traceable requirements for their compliance programs.

I will leave aside the first, since it may only be of interest to a niche audience, and focus on the second that likely will have more far-reaching impacts and potential for (re)use cases for its fundamental technology building blocks.


AI / Machine Learning / Natural Language Processing (NLP) meets Regulation

Aside from the sheer volume of regulations faced by businesses who operate in multiple jurisdictions and are subject to multiple regulators, is the fact that it arrives in different formats via different sources. The state of the art of machine learning is such that it now gives companies a fighting chance to extract the individual regulatory obligations from documents and digest the information so that it maps to the existing controls and policies of the company. The result is that a coherent gap analysis can show what needs to be done, by which individual line of business, in relation to a pronouncement by a regulator. At least that is the promise that several of the RegTech100 (e.g. Apiax, Ascent, Compliance.ai, Capnovum) are chasing down.

Potential buyers should be aware that they bring limitations to the table if their own organizations are a complex matrix, across multiple lines of business, cobbled together through acquisitions. The RegTech solutions can only make sense of the rules – you have to be willing to make sense of yourself too.

Given the above need for a solution that reaches all the way through the second half of the problem, I am championing a proof-of-concept for the ultimate parent company of my employer to use AI (open source NLP Python libraries) to map our obligations to our controls, even if we source the regulatory feed from an external RegTech vendor. We envision that full automation is not feasible or desirable and, there will always be an expert “human in the loop” but the AI will at least speed tasks and may improve quality and completeness for more repetitive aspects of the mapping tasks. At the very least, we can expect to learn something.


Big Problems, Small Companies

Let’s talk about the scale of the companies that are getting noticed in the sector. Looking across the 96 companies for which I have data, only 19 are above $10 million in revenue per year of which only 6 earn above $50 million. Here is the full breakout:



Take-away: The most innovative solution providers, as recognized by the experts, will not have massive advertising and marketing spend available to them. Customers will have to do some searching and invest effort educating themselves to find the solutions that meet their needs. For funders in the space, it is clear that there will be consolidation and venture-backed wagers have a good chance to yield attractive exits to strategic acquirers.


Upcoming post: coming soon, a conversation with La Meer Inc. founder, Laxmi Ramanath, a recent RegTech100 addition. We will discuss what it meant for her business and what is to come from La Meer.

[1] RegTech Market by Solutions, Services, & Application | Regulatory Technology Market Size, Share, Industry Analysis and Market Forecast to 2025 | MarketsandMarkets™ [2] RegTech100 – The world’s most innovative RegTech companies that every financial institution needs to know about (fintech.global) [3] There are some data gaps since these are newer companies - some are listed under brand names or not yet picked-up coverage by CrunchBase. LINK: REGTECH100-2021 | Crunchbase Subscription or trial may be necessary.


01/21/2021

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