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The hype surrounding the RegTech market has died down. So what’s left? Actually, some great solutions but the market strategies that underpin then need better direction.

Three years ago, I was asked by Private Equity firms, on a near weekly basis, to describe and opine on the RegTech market. Then things went quiet. What’s happened since and why should investors, who previously passed on this market revisit it now?

What is RegTech?

Market analysts have been inconsistent in defining RegTech – a task made more challenging by many vendors rebranding themselves as RegTech, with the expectation that the associated hype would drive more sales. But the core of this market could be defined with just three axioms:

RegTech exists to minimise the impact of regulatory compliance on customer services and experience.
RegTech is embedded in front-line processes - rather than monitoring controls, it IS the control.
RegTech solutions focus on addressing a specific aspect of a specific regulation.

Any 'RegTech' badged products that align to these axioms (and most do) are well positioned for robust and significant growth. Within the broader risk and regulatory technologies market there are three drivers for spending – new regulation, responding to a reputation-damaging event, or a cost saving program. Of these, it’s regulation that drives most spend. Moreover, regulatory responsibility is increasingly shifting toward the front-line, the focus for RegRech and where budgets for technology tend to be the largest.

Hence, while the risk and regulatory technologies market as a whole is growing at 8-12%, the RegTech segment is closer to 20%. That was as true three years ago as it is now.

If that’s the case, why did so many investors pass? One word – scale. The majority of this market comprises a large number of small, early stage vendors, with revenue and EBIT figures being well below the threshold for many PE, even early stage PE.

But that was three years ago. In that time, various RegTech players have flourished (while others have inevitably failed), and have potential for significant extra growth. How might that be best achieved? As noted above, RegTech solutions are typically highly specialised, with each vendor requiring a high volume of customers to take their very problem-specific solution. Hence the market is ripe for sensible consolidation. Here’s how:

Regulatory alignment: In some ways, the RegTech moniker has been unhelpful. Prospective buyers search for solutions to address a specific regulation – no one buys ‘RegTech’ per se. So better marketing would definitely help.
Value chain development: Revenue-builders need to think about consolidating vendors who are all addressing different aspects of the same regulatory need – an obvious example here would be technologies for onboarding third parties and managing transactions to comply with financial crime regulations. Joining forces and pooling business development effort would make a lot of sense.
Cross-over: Many RegTechs provide capabilities relevant to more than one regulation or sector. Identity verification, for example, is relevant to multiple industry sectors. Hence sensible RegTech consolidation allows for greater cross-sell without impacting clarity of marketing message.

Significantly, growth through consolidation needn't require technical integration, but instead should focus on amassing solutions developed for the same personas. The RegTech market has reached the point where a number of players are sufficiently well proven to maintain a reasonable growth trajectory but, through M&A, could enjoy significantly greater growth.

— Gareth Evans is an industry leader in the Risk and Regulatory technologies market supporting risk and compliance professionals, vendors and investors alike in the financing, development and application of class leading solutions.

To connect with Gareth or the wider CMBYND team, please contact us.