According to the European Banking Authority (EBA), Regulatory Technology (RegTech) encompasses a range of applications of technology‐enabled innovation to help fulfil regulatory, compliance, and reporting requirements by a regulated institution.
The use of technology to fulfil these requirements is not new with technology having been used as early as the 1990s when banks began using electronic databases to manage customer information and track transactions, primarily to comply with anti-money laundering (AML) requirements. In the early 2000s, spreadsheet tools like Microsoft Excel became widely used to generate regulatory reports. By the mid-2000s, automated transaction monitoring systems had been introduced to detect fraud or suspicious activity, but these were largely rule-based and lacked the advanced data processing capabilities seen with modern RegTech. The 2020s have seen the increased integration of innovations such as AI, blockchain, and big data analytics which have been crucial in making a case for RegTech as a tool to transform the mundane compliance function. In particular, AI and machine learning have enhanced data analysis and offer predictive insights, enabling institutions to identify compliance risks early.
Written by: Shirley Mabasa
What drives RegTech market?
The increasing complexity of regulation has been the primary driver of the growing RegTech market, as businesses face heightened compliance demands across various sectors including finance, data protection, and cybersecurity. Regulatory frameworks are evolving rapidly, with new rules emerging in response to global crises, technological advancements, and the need for enhanced transparency. For instance, regulations such as the General Data Protection Regulation (GDPR) in data protection or Anti-Money Laundering/ Know-Your-Clients (AML/KYC) in financial services have expanded in scope, requiring companies to manage larger volumes of data, ensure transparency, and monitor transactions in real-time. This increased regulatory burden is also reflected in the ballooning cost bases for companies. It is estimated that companies spend between $1-5 million on compliance for every $1 billion earned in revenue.
Considering this, the UK government introduced the Business Impact Target (BIT) in 2015 with the objective of reducing the cumulative costs of regulation on businesses. Under the BIT, a target for regulatory costs would be set over each parliamentary term, with progress reviewed annually. Despite this, companies continued to bear with ever-expanding regulatory costs.
Table 1: The change in regulatory costs under the BIT
Target | Actual | Delta | |
2017-2019 | -£9bn reduction | £7.8bn | -£16.8bn |
2019-2024 | 0£bn (unchanged) | £14.3bn | -£14.3bn |
Source: UK.GOV
A summary report of regulation costs for 2022-2023 showed an estimated increase of £17.2bn in the cost of regulation for companies in the UK.
Figure 1: The Estimated Increase in Regulatory Costs in 2022-2023
Source: UK.GOV
In light of this, it should come as no surprise that the UK government scrapped the BIT programme in 2021, citing its ineffectiveness. This means that regulatory costs are expected to pose an ongoing challenge for companies.
Furthermore, increasing regulatory costs disproportionately affect small firms because larger firms can spread these costs across their operations. For smaller firms, higher regulatory costs lead to declines in sales, employment, markups, and profitability. Increased regulation has been shown to drive market concentration, lowering the elasticity of entry relative to Tobin’s Q (market value), productivity, and investment after the late 1990s. This demonstrates that higher regulatory costs give large firms a competitive advantage, enabling them to grow larger while small firms shrink.
The Cost of Non-Compliance
The direct costs of non-compliance with financial regulations can extend into hundreds of millions for companies. The indirect impacts, including transaction friction and failed authentication, exacerbate financial losses, reflecting how non-compliance not only incurs direct penalties but also affects customer trust and operational efficiency. This example (fig. 2) highlights that the financial implications of failing to comply with regulatory and security standards goes beyond the fines and penalties typically imposed by regulators. Non-compliance can impact a company's long-term performance and reputation.
Figure 2: Estimated Costs of Financial Crime, Fraud, and Cybersecurity Crimes ($m)
Source: McKinsey
With increased regulations driving significant market impacts, there has been a growing demand for RegTech solutions that help companies, especially smaller firms, manage compliance more efficiently. This presents an opportunity for VCs to capitalise on this trend by investing in startups that are offering innovative solutions to help companies mitigate this regulatory burden.
The Market for RegTech Solutions
RegTech start-ups play an important in helping firms comply with regulatory requirements by acting as intermediaries between buyers (firms) and regulators. RegTech start-ups offer a range of services, including compliance management, KYC/AML, regulatory reporting, risk management, and transaction monitoring.
Figure 3: The Role of RegTech in Industry
The benefits of using RegTech solutions can be organised into 5 key themes:
Cost Reduction: RegTech automates traditionally manual compliance tasks, such as KYC checks, drastically lowering labour and operational expenses. This streamlining allows companies to reallocate resources to other critical areas while maintaining regulatory compliance.
Efficiency Improvements: Automated systems help organisations manage compliance processes with greater speed and precision. RegTech's real-time data monitoring capabilities ensure compliance issues are identified and addressed promptly, reducing the risk of non-compliance.
Improved Accuracy: Leveraging machine learning and advanced algorithms, RegTech enhances the accuracy of regulatory reporting and compliance management. This reduces human errors and mitigates the risk of costly penalties for inaccuracies in compliance efforts.
Enhanced Customer Experience: By automating and structuring customer interactions and data management, RegTech improves the overall customer journey, reduces complaints, and ensures smoother updates, ultimately strengthening client relationships.
Risk Mitigation: With real-time data monitoring, RegTech helps businesses proactively avoid regulatory breaches and automate risk management, which is especially crucial in times of crisis, such as during the COVID-19 pandemic. This also enables companies to combat issues like cybercrime and fraud more effectively.
Players in the RegTech Market
The RegTech market is large and growing. In the UK & Ireland alone, there are 718 RegTech start-ups. The UK RegTech market is a key player in the global regulatory technology sector, with a strong presence in financial services. This dominance has been enabled by strong support from UK regulators (Both the Financial Conduct Authority (FCA) and the Bank of England (BoE) have led initiatives such as the TechSprints to encourage the development of technology-enabled regulatory tools). The UK market is the second-largest in the world, after North America, and the largest in Europe. Fig. 4 below shows a mapping of the RegTech landscape in Europe and the UK.
Figure 4: A Mapping the RegTech Start-ups in Europe
Source: Xange VC
Investment Activity in the RegTech landscape
The global RegTech industry has seen a strong level of deal activity ranging from M&A, private equity and venture capital.
This investment helped push RegTech solutions past pilots and out of the innovation phase so that they could begin operationalising benefits in a real-life environment. This, in turn, helped RegTech providers convince financial institutions that the value they now offered was real and meaningful.
Nasdaq’s recent $10.5 billion acquisition of Adenza highlights the growing urgency for companies to keep up with evolving regulations and skyrocketing compliance costs. With more than 246 RegTech deals in 2024 totalling over $3.9 billion, it's clear that businesses are snapping up RegTech solutions to manage these burdens. M&A in this space is heating up as companies look to stay ahead of the curve.
There are several start-ups that have managed to make significant inroads in this competitive sector:
Discai
Discai, based in Brussels and powered by KBC Bank, stands out in the RegTech space with its deep integration within the banking sector, making it uniquely positioned to address the specific regulatory needs of financial institutions. Unlike many RegTech firms, Discai is essentially "built by a bank, for banks," leveraging its parent company KBC’s vast industry experience. This close connection allows Discai to tailor its Know Your Transaction (KYT) Anti-Money Laundering (AML) solutions specifically to banking operations, offering a level of precision and efficiency that is hard to match. Its KYT AML solution is reportedly 3x times more efficient than traditional approaches, streamlining complex compliance tasks like detecting and reporting money laundering activities. This efficiency not only helps banks meet regulatory requirements but also empowers them to navigate the intricate regulatory landscape with enhanced operational insight. By combining in-depth banking expertise with cutting-edge data science, Discai delivers a solution that offers an unmatched blend of regulatory compliance and banking know-how, setting it apart from competitors.
ComplyAdvantage
UK-based ComplyAdvantage has also attracted attention from investors. The company distinguishes itself as a leading RegTech company by offering real-time risk intelligence for financial institutions. Its key focus is on AML and counter terrorist financing compliance, using machine learning and AI to continuously monitor transactions, clients, and entities for suspicious activity. ComplyAdvantage's real-time database of individuals and organisations at risk of financial crime sets it apart from competitors, providing enhanced due diligence, faster onboarding, and improved fraud detection capabilities. By automating compliance and streamlining risk management, ComplyAdvantage enables institutions to meet regulatory requirements efficiently while mitigating financial crime risks.
RegTech and ESG
The insurance industry has made a compelling case for leveraging RegTech to meet Environmental, Social, and Governance (ESG) requirements, a growing priority in modern business landscapes. As stakeholders increasingly demand ESG accountability, insurers face significant challenges, such as managing complex data, aligning underwriting with climate risks, and addressing regulatory demands. RegTech solutions simplify these processes by centralising ESG data, improving transparency, and ensuring compliance with dynamic regulatory frameworks. For insurers, adopting RegTech not only enhances operational efficiency but also improves sustainability practices, reporting accuracy, and reputation management, providing a competitive edge.
For the venture capital (VC) industry, RegTech solutions for ESG compliance represent a key investment opportunity. As more businesses embrace sustainable practices, VCs can play a pivotal role by investing in startups that offer innovative RegTech solutions for ESG, driving both financial returns and positive social impact. Moreover, by incorporating RegTech solutions into their own due diligence processes, VCs can better assess portfolio companies' sustainability practices and mitigate risks, aligning with the growing importance of ESG in investment decisions.
Challenges Faced by RegTech Start-Ups
RegTech vendors encounter numerous challenges, which include:
Data access, as financial institutions, are often hesitant to share sensitive information like transaction data. Many early-stage vendors try to bypass this by utilising regulatory Sandboxes or synthetic data for proof of concepts, but this doesn't always secure long-term success.
High customer acquisition costs arise from long sales cycles, largely due to financial institutions’ limited understanding of RegTech’s benefits and the absence of a unified taxonomy that makes identifying the right stakeholders difficult.
The competitive landscape also poses hurdles, as differentiating products becomes challenging, especially with high costs for infrastructure and security—critical for startups that often have limited funding. Many vendors struggle to secure funding, especially when moving from seed to Series A, as long sales cycles delay initial revenue generation.
Clients frequently view RegTech as a back-office function, resulting in underinvestment and a failure to recognise its potential for driving competitive advantage. Procurement and IT planning cycles are slow, and incumbent vendors dominate the space, making it difficult for new entrants to gain traction.
These challenges could serve as barriers for RegTech adoption, especially for startups trying to scale in the highly regulated financial sector. Some market segments are becoming saturated with undifferentiated products. For VC investors, this makes the task of picking winners in the sector even more challenging.
Trends / Outlook for the RegTech Industry
Predictive Analytics: Startups are leveraging predictive analytics to forecast compliance risks by analysing historical data and regulatory trends, enabling proactive mitigation of potential issues.
Market Growth: The global RegTech market is projected to grow from $15.8 billion in 2023 to $85.92 billion by 2032 at a CAGR of 23.6%, highlighting its rapid expansion in the financial sector.
Rising Regulatory Complexity: Increasing regulations in areas like AML, KYC, and ESG are driving demand for automated compliance solutions that help firms manage complex legal frameworks efficiently.
AI and Machine Learning Growth: RegTech's integration of AI and machine learning enhances risk detection and predictive compliance monitoring, making these technologies essential for fraud prevention and financial crime management.
ESG Compliance Focus: As sustainability becomes a regulatory priority, RegTech is emerging as a key tool for tracking and reporting on ESG metrics, helping firms comply with evolving standards.
Cross-Border Compliance: With more firms operating across jurisdictions, RegTech solutions that streamline cross-border compliance are expected to continue gaining traction, especially in the fintech and crypto sectors.
Investment Focus: A survey shows that 10% of investments will focus on financial crime prevention technologies (AML/KYB/KYC), followed by governance, risk, and compliance (9%) and ESG, regulatory reporting, and AI (8%), signalling key opportunities for VC investors.
Of course, RegTech isn’t magically making the tangled web of compliance disappear. Instead, it is reordering the pieces, promising a more manageable, transparent, and—dare we say—user-friendly world.
As regulatory scrutiny intensifies, technologies that streamline the compliance function are becoming indispensable to companies in highly regulated sectors. VC Investors are also increasingly drawn to startups offering holistic compliance solutions that integrate smoothly with existing systems, particularly in governance, risk, and compliance.
Moreover, emerging areas like ESG compliance and AI-driven regulatory reporting present new investment opportunities. These technologies help firms navigate evolving regulatory landscapes while fostering long-term growth in the RegTech sector. As compliance demands continue to rise, RegTech plays a crucial role in helping firms manage risks, stay resilient, and remain compliant amid these structural changes.
Comments