Regtech investment opportunities

Regtech investment opportunities

Regtech investment opportunities could be a bright spot for investors in 2019.

A constant flow of investment regulations since the financial crisis of 2008 means that the financial sector is now required to keep on top of compliance or face heavy fines.

So a highly regulated environment has provided regtech investment opportunities in banking, insurance, and the investment sector

Regtech investment opportunities can be found where technology companies are providing their clients with software that helps to reduce the administrative burden by cutting through all red tape investment regulations.

These regtech suppliers have entered the market with a specific aim of supporting and helping financial service firms of various sizes to navigate through their compliance requirements and thereby avoid costly fines.

So how do investors spot Regtech investment opportunities?

These Regtech companies use a combination of emerging technologies, Artificial Intelligence AI which enables them to provide their clients with automated supervision.

Tomorrow’s compliance officer might also be replaced by some AI technologies provided by Regtech companies.

To identify Regtech investment opportunities let’s first understand Regtech firms in terms of the service that they provide

An examination of 391 regtech firms worldwide courtesy of visual capital has identified seven areas where regtech firms are active. Account verification at 26% is the most common service provided by regtech firms. This area involves gathering and verifying information to anti-money laundering policies. Then comes general compliance at 16% where regtech firms offer enterprise-grade solutions, case management, and automated notifications. Data capture and integration (14%) and monitor activities represent (13%) of regtech firm’s activity. Regtech firms are active in risk analysis also (13%). Regulatory analysis, reporting analysis and training make up a smaller portion of a regtech firm’s activities.

What are the challenges facing regtech investment opportunities?

A number of firms may decide to develop their in-house regtech solutions rather than using external regtech solutions.

The number of firms developing in-house regtech solutions amounted to 22%, which is likely to be priority software that may not be repackaged and sold. A little under half, 44% of companies are deploying a mix and match of regtech solutions developed in-house and external.

Nevertheless, regtech budgets are expanding, the pie is getting bigger which is likely to provide tailwinds for regtech investment opportunities

A global survey of financial services risks executives said that budgets are likely to expand in the next few years. Very likely said 33% of executives, 28% said somewhat, 21% extremely likely.

Only 14% of financial services risk executives said that budget expansion was not at all likely and 4% not so likely.

So regtech investment opportunities are likely to grow as the world accelerates towards digital technologies that need to be regulated. Regtech firms could make the list of good stock picks for 2019.

But the challenges for investors will be to gauge whether these regtech firms will develop generic software solutions or work in-house to develop priority solutions. In the latter case, regtech firms might not be able to repackage and sell their software solutions to other customers.