Heraclitus, a Greek philosopher of the 5th century BC, is quoted as saying
“Change is the only constant in life.”
His doctrine was around change being central in the universe. This has also been translated to “the only constant is change.” And this exactly why Regtech, the cross-sector Fintech category, thrives and will continue to do so.
Whether one regulatory body is becoming lighter or stricter, change is what Regtech needs to be able to serve. A modular Fintech design of Regtech services, is key in both of these cases. For example, if the US changes its strict and complex multi-layer regulatory structure as a result of the Trump administration, the Regtech sector will not be affected; neither the size of the sector, nor its significance in the multi-carriage train of financial innovation. The train has left the station and there is no turning back. In every compartment, there is a place (albeit a moving target) for Regtech and this will not change.
Regtech companies will continue to serve the huge market need of integrating legacy systems of the incumbents and at the same time offering these services in a dynamic (quick and cheap time to market) way as regulations change. Regtech will always have new clients and areas to serve, as a result of regulatory changes. The recent announcement of the Office of the Comptroller of the Currency (OCC) in the US to offer an opening to the US federal banking system to Fintechs; is an example, of how new clientele will be flocking to Regtechs can serve the new business needs of Charter Fintech Banks.
“A top regulator said Friday that his agency would for the first time start granting banking licenses to “fintech” firms, giving them greater freedom to operate across the country without seeking state-by-state permission or joining with brick-and-mortar banks.” By WSJ Regulator Will Start Issuing Bank Charters for Fintech Firms.
The US Regtech Fintechs have been different than the European in two main ways. First, the number of European fintechs is much larger basically because of there are more regulations (e.g. MIFID, EMIR, MAR, CRDIV, PSD2, REMIT etc) that apply to all EU countries and second because in Europe bootstrapping and growing businesses without strong VC support, is more common than in the US. On the other hand, in the US the complexity of regulations is mainly due to cross-state differences and incumbents have tried to find other ways to circumvent these frictions; plus, entrepreneurs prefer naturally to pick naturally businesses that have a higher probability of being funded by VCs. Regtech overall hasn’t been the favorite baby of VCs.
The US Regtech sector will not be hurt, in case of lighter regulations by the new US administration, simply because any type of change will create new opportunities and clientele. Regtech Fintechs have an advantage compared to the Regtech offerings by incumbents (and there are many) like Thomson Reuters, Bloomberg, IBM, Oracle etc. only because they can adapt faster. Whether they will able to execute on this advantage is yet to be seen. We will be monitoring how the acquisition of Promontory by IBM plays out, what market share Accenture and Bloomberg gain as they all have no procurement issues, which is an important friction for Fintechs. FundApps, the UK based Regtech focused on serving the investment management sector, just announced that they will be opening a NY office in the Flatiron district. This is the first international Regtech move from Europe over to the US. Regtech is less local than it looks at first site. I foresee, more moves from Europe towards the US in 2017, rather than in the other direction.
“The only constant is change, in regional and cross-border Regulations”.
The increased fragmentation and complexity, resulting from Brexit, will also open up more opportunities for Regtech services. The pain points are simply changing.
Similarly, in Switzerland and the East, we are seeing new regulations that will also need to be served. All these changes, are great opportunities for Regtech companies to show incumbents especially, that Regtech should be seen as an enabler rather than an expenditure.
Regulations lighter or stricter, new regulations, more or less complex, fragmenting or integrating; are great market opportunities for Regtech Fintechs and for incumbents with Regtech services. The biggest threat to Regtech Fintechs is rather the incumbent Regtech offerings.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.