Regtech: The sub-segment of fintech helping financial institutions meet their regulatory obligations

Regulatory technology or regtech, has evolved into a crucial sub-segment of fintech. Regtech providers specialise in software solutions that help companies meet a large variety of regulatory requirements efficiently and cost-effectively. And Ireland is home to some world leaders in the area including homegrown unicorn Fenergo which broke through the $1 billion valuation threshold back in 2021.

“In very simple terms, regtech is a range of technology solutions that help financial institutions with their regulatory obligations and requirements,” explains Owen Lewis, head of banking and capital markets at KPMG. “This could include support from a technology perspective in relation to data extraction for regulatory returns for example or the use of AI in anti-money laundering (AML) and know-your-customer (KYC) obligations. There are many more.”

Regulatory oversight is becoming increasingly data-driven, and this means that regulated financial services entities are under more pressure with more detailed and frequent data requests.

“Regtech is helping these institutions meet their regulatory expectations in a timely and cost-effective manner,” says Lewis. “Regtech helps institutions deal with matters such as financial crime, cybersecurity, regulatory change, market integrity and transparency, environmental, social and governance (ESG) reporting, data protection, tax compliance and more.”

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A strong indigenous cluster

The Irish regtech sector is performing well at the moment, according to Karen Cohalan, manager fintech, financial and business services with Enterprise Ireland. “Companies like Corlytics, Fenergo, ID-Pal, Daon, and KnowYourCustomer, are all doing well in areas like customer onboarding, managing client lifecycles, identifying fraud, anti-money laundering, and other aspects of regulatory compliance,” she says.

“We have a strong cluster of indigenous regtech companies who benefit from the vibrant financial services industry and large tech multinationals who are located here in Ireland,” she adds. “They are building on a strong track record of supporting regulatory compliance. Irish companies have been supplying services to the world’s largest financial institutions for many years.”

Lewis agrees. “Ireland boasts a unique infrastructure and well-established financial and technology hub with, for example, over 40 per cent of global hedge fund assets serviced in Ireland. It also has a talent pool for regtech, sourced from excellent academic institutions, global tech giants and a vibrant financial services sector. Regtechs operating in Ireland benefit from a highly concentrated and collaborative environment, as the ability to create, test, and implement solutions with global players.”

The industry continues to develop. “There are some really interesting new regtechs emerging from an Irish perspective, though given the international reach of some of the regtech solutions a number of international competitors can play equally in the Irish market,” Lewis notes. “There are some interesting indigenous regtech offerings emerging, particularly in the context of KYC and AML.”

Changing regulatory environment

While tech has seen a global slowdown in recent months, particularly due to rising interest rates and inflation globally, regtech is expected to continue to flourish as financial services businesses seek solutions to address the changing regulatory environment, he contends. “We’re seeing increasing investment in regtech as companies grapple with ongoing regulatory changes such as Basel IV, the EU Market in Cryptoassets Regulation, the Digital Operations Resilience Act, the AI Act, the Digital Services Act and new and incoming ESG standards. There’s also a growing focus on the use of AI and machine learning technologies to enable AML solutions.”

Sustaining that success will be dependent on a number of factors, according to Lewis. “The growth of regtech will be heavily dependent on the ability of the technology to plug directly into the regulatory entity systems and databases and with an ongoing reduction in the manual or human overlay that is required to operationalise the technology. The continued complexity of regulatory obligations will also be a help.”

Continuing support will be required. “It’s essential that policymakers, government and regulatory bodies continue to support the sector, making the required interventions that will deliver on skills improvement, training, funding and R&D. It’s important for regulators to work with regtechs to strike the right balance between encouraging innovation and safeguarding the financial system from unknown risks.

“A key focus on supporting innovations through innovation hubs and regulatory sandboxes has been at the heart of thriving ecosystems of regulators, innovators and incumbents. It’s heartening to see this is firmly on the agenda for Ireland.”