RegTech, what is it? What are we talking about when we talk about RegTech? The question is simple, but the answer is complex: it’s a part of FinTech, but it’s also an incredible opportunity for many companies to make their organization more agile, more efficient and more competitive in an increasingly digital marketplace.
A relevant aspect of any modern business is that it not only wants to be efficient and competitive. It also needs processes that comply with legal requirements and national and international standards of reliability and security.
It is no coincidence that every economic activity, every business must have an internal structure that meets certain characteristics in order to be efficient from a regulatory point of view. However, to understand what RegTech is, we need to take a step back.
It all starts with compliance
Within every business and every regulatory environment, we often hear about compliance.
Compliance is conformity to certain norms, rules or standards; in companies, regulatory compliance means compliance with specific provisions issued by legislators, industry authorities as well as internal regulations within the companies themselves.
This definition suggests that there are many different types of compliance that are regulated by the government, at least as many as there are business sectors, although the most important tend to be in the financial and banking sectors, and only secondarily in the corporate sector. From a broader perspective, the compliance of a company or a bank also relates to the “behaviors” within the company.
Each of these players, in fact, must conduct themselves in an ethical and sustainable way, in a way that is as transparent as possible, so that the actions are always traceable and verifiable and where it has a positive impact on the community where it operates. For this very reason, compliance is mandatory for certain types of economic activity, as in the case of banks and intermediaries offering financial services, which must comply with the provisions established by the Bank of Italy, Consob, and ISVAP.
The need for an internal regulatory system capable of ensuring transparency and accountability has increased further with the advent of digital transformation, which has greatly simplified processes and the ability to implement more accurate and reliable controls. It has also opened up critical issues and generated specific needs that can only be met through digital solutions.
What is RegTech?
If we look closely, it is precisely from these needs that Regtech was born, as a result of digital transformation. In just a short period of time, RegTech has become an area of considerable interest, particularly given the spread of digitization across the globe.
In 2015, the expression was made official by the Financial Conduct Authority, which is the main financial market watchdog in the United Kingdom, one with the power to regulate the UK financial products market, establishing the minimum standards to which companies must adhere.
Precisely in light of this oversight and control role, the FCA, after a period of consultation that was open to the public and industry experts (Supporting the development and adoption of RegTech), concluded that Regtech are “new technologies to facilitate the delivery of regulatory requirements.”
This definition highlights an interesting aspect of RegTech that we’ve already anticipated and allows for a clearer, more contextualized definition: you can’t talk about RegTech without talking about FinTech.
FinTech – a term born from the combination of Finance and Technology – is “the provision of financial products and services through the most advanced information and communication technologies (ICT)”, generally by new companies that base their operations and their business on said ICT. The type of services that fall under FinTech is varied and includes all those services that can already be obtained from traditional companies (e.g. payment services, financial management, financial intermediation) as well as those decidedly more innovative – and in recent years also trendy – such as Bitcoin.
In a certain sense, RegTech is just the “other side of the coin” of FinTech: just as FinTech facilitates the provision of financial services, so RegTech makes it easier and more effective to manage and control regulatory requirements which, coincidentally, are important in the financial and banking sector.
By now, it is unthinkable that there can be one without the other. Hence, the considerable importance that the sector has acquired over the years and that it has especially shown in the Covid-19 period that has just passed, given that many companies have found themselves having to accelerate their digital transformation and adapt their internal processes accordingly.
Similarly, users have also begun to increasingly use online digital financial services, making the adoption of RegTech systems even more urgent (and strategic).
A valuable but still undervalued sector
The current situation, therefore, suggests that investing in RegTech is not only necessary but also convenient, given that the next few years promise to be times of rapid digital growth, especially in Italy where there is ample room for development.
Suffice it to say that in Italy, there are about 20 large companies who preside over this type of business, which is small compared to the rest of the world where there are many more such companies and in a context that is much more advanced. However, this does not mean that RegTech represents a small sector in Italy, on the contrary.
For example, in 2017 the total turnover in Italy was € 5,448,754 (marking growth of 15% compared to 2016), which is in line with the growth values identified globally by Accenture, who predicted that by 2023, the RegTech sector would exceed $7 billion globally, with a compound annual growth rate of 25.4%. In addition, over the last few years there have been signs of growth and change. Already in 2017, in fact, PWC reported that there were 235 start-ups dedicated to FinTech, of which at least 10% were dedicated exclusively to RegTech.
Despite the small number, such Italian start-ups have often distinguished themselves in the market for their ability to raise significant investments abroad and complete multimillion-dollar funding rounds , as happened in 2017, also thanks to the interest of many foreign investors, European and otherwise.
The attractiveness of RegTech on the market
In light of the above data, it is clear that there is room for growth and new business in RegTech in Italy and beyond.
This is also due to the fact that RegTech is an extremely versatile sector where it is possible to move between different areas of interest and develop useful digital solutions, especially in the current period where the internet has become even more strategic and essential for all players in any sector.
In particular, we can distinguish six main “areas” of activity where companies can operate in order to build in the context of RegTech:
- The first is related to negotiations, or the so-called Commerce Platform in general, where users exchange or purchase goods and services: in this area RegTech is fundamental since it is necessary to manage transactions and especially the transfer and use of personal, financial, and other data;
- Regarding personal data, the second area is that of Personal Data & ID Management, which concerns the management and protection of personal and identity data, one of the most important and impactful issues in recent years, also due to the growing attention of the Italian and European legislator on privacy;
- The third area is that of document management, which is particularly for all companies that want to move towards greater dematerialization. In order to properly complete the transition, solutions are needed that support document management in compliance with current regulations: the need then becomes a real necessity when it comes to electronic invoicing, which is now a reality for all businesses on a daily basis;
- The fourth aspect is closely linked to the development of software for internal regulatory and compliance, which is useful for cyclical compliance with current regulations and, above all, for constantly updating the various company processes;
- Finally, the last “macro-environment” where RegTech can express its potential is that of tax assistance, that is, digital support in the context of tax management, which can range from providing simple and easily accessible information, to guaranteeing support in acquiring tax documents, and up to assisting operators in correctly carrying out the required actions, such as calculating benefits, facilitating the preparation of estimates, remembering deadlines, and various tasks, etc.
The characteristics of a successful industry
At this point, you may be wondering what the secret of such a potential industry is, and more importantly, what features you need to ensure your clients are provided with a high-quality service that actually contributes to business growth.
The key to a successful RegTech service is undoubtedly agility. The management of documentation, taxation, etc. is usually associated with unnecessary and complicated procedures, which take time and resources. On the contrary, RegTech, among other things, was created precisely to eliminate this aspect of management. For this reason, PWC has identified four characteristics that every RegTech service must have in order to be successful.
The first characteristic is precisely that of agility, which in itself contains many different aspects, such as that of “nimbly” organizing all the data and information available to a company, making sense of everything, and above enabling its immediate management despite the enormous amount of material to be managed.
The second characteristic is undoubtedly that of speed: agile management is above all fast management, which minimizes times and steps, so as to optimize the entire flow. From this point of view, RegTech can count on modern technological resources, such as Artificial Intelligence, which can be used to speed up these steps without affecting the quality of the final result.
The third characteristic is integrability, but it could also be “adaptability,” since the RegTech solutions to be developed must be easily implemented within any business organization, and they must be able to quickly cope with any changes.
Lastly, a fundamental aspect of RegTech is analysis: with lots of data comes the need to understand it; a large number of requirements to be met means a great ability to exploit big data while remaining within the rules, even considering constantly increasing traffic volumes.
Not just compliance, but a resource
In light of the above, a final consideration emerges, which in some ways complements the definition provided at the beginning: RegTech is much more than just digitalization applied to compliance.
On closer inspection, RegTech is an effective tool for transforming an organization and taking full advantage of all the benefits of digital transformation, reducing the opportunity represented by outdated procedures and audits of regulatory requirements.
On the contrary, they become a factor of competitive advantage thanks to RegTech, which facilitates and simplifies their management, becoming an additional weapon to be used for differentiation from players within any market.
