‘Regtech’ startups see more business in Trump era
President elect Donald Trump is pro-business and anti-red tape. But what if your business is red tape? Companies whose technology helps banks and investors cope with the welter of post financial crisis regulations and avoid increasingly hefty fines — a sector known as “regtech” — are sanguine about Trump’s pledge to dismantle some of those reforms.
Their equanimity is based on a belief that if regulations are replaced rather than scrapped and the overall system of rules becomes more fragmented, financial firms will need their systems to navigate the new landscape.
“Change is itself a driver of regtech adoption,” said David Buxton, the chief executive of compliance startup Arachnys. “Volatility creates opportunity for relatively nimble regtech firms.”
Founded in London in 2010, Arachnys helps financial services firms carry out anti-money laundering and other compliance checks by automating the analysis of more than 16,000 public and private sources of data. It’s one of a growing cohort of mostly private companies that use new digital technologies, such as cloud computing and big data processing, to help financial institutions comply with regulation ranging from rules on trading conduct to know-your-customer procedures.
Despite the results of the US election and expectations that the new administration will take a softer stance on the enforcement of financial rules, Arachnys is moving forward with US expansion plans and renting out bigger office space in midtown Manhattan.
“The top 10 deals that my sales team are currently focused on, not one single one has voiced any concerns about ‘wait and see’ in the regulatory environment,” Buxton, who is currently based in New York, said.
Regtech companies such as Arachnys have become the new darlings of the private investment world as financial firms are expected to accelerate their spending on compliance technology to $72 billion by 2019 from $50.1 billion in 2015, according to research firm Celent.
Venture capitalists have invested $2.3 billion in regtech start-ups globally since 2012, according to data provider CB Insights. Funding volume is expected to drop 2 per cent this year to $576 million compared to 2015, but activity is expected to grow 15 per cent to 90 deals, according to CB Insights.
Trump has said he wants to dismantle the Dodd-Frank Act, a massive piece of reform legislation passed by the Obama administration in 2010 in response to the financial crisis, though he has not detailed how he would fulfil that pledge.
Members of the incoming administration have pinpointed the law’s Volcker rule, which bans banks from making speculative bets with deposit-insured funds, as one that needs changing and a rule protecting retirement savers, set to be rolled out in April, as one that should be torn up.
“If the landscape changes yet again, even if the direction of travel is towards lighter regulation, banks will still need lots of assistance understanding the new regimes and updating their systems and processes accordingly,” said Angus McLean, a partner at law firm Simmons & Simmons.
And financial firms will always want to cut costs, regardless of who is in the White House.
The use of artificial intelligence, cloud computing and big data processing to automate many of banks’ most labour intensive compliance functions — from listening to hours of phone call recordings to spot misconduct to going through hundreds of spreadsheets to calculate an institutions exposure to risk — is still a big draw.
“Using next generation technology to uncover, structure, analyse and action customer data to reduce risks for the business is an imperative that will flourish regardless of government,” said Lex Sokolin, the global director of fintech strategy at research house Autonomous Research.
To be sure, if incoming rules are scrapped without new regulations introduced to replace them, then regtech firms whose business is based around them could see customer orders and their own funding dry up.
For example, companies that sell software exclusively focused on helping a bulge bracket bank keep track of risk and trading metrics that would trigger the Volcker rule.
“Any uncertainty around deadlines or indeed outright implementation can only serve to confuse the end user and hence have a slowing impact on adoption,” said Mark Beeston, a managing partner at fintech venture capital firm Illuminate Financial Management.
The use of artificial intelligence, cloud computing and big data processing to automate many of banks’ most labour intensive compliance functions is still a big draw.