What are the biggest mistakes RegTech companies can make?

The RegTech industry has proven resilient throughout the Covid-19 crisis, but vendors better avoid making big mistakes to ensure their future success.

So far, RegTech has proven to be particularly robust in the face of the coronavirus pandemic. In fact, the first half of 2020 saw the sector enjoy a 5% increase in total funding, compared to the first six months of 2019. Nevertheless, the sector did hit a five-quarter low between April and June this year, attracting only $1.5bn in total investment.

With that in mind, the innovators and entrepreneurs in this space can no longer afford to make mistakes. As the pandemic shows no sign of stopping, making an entrepreneurial faux pas can no longer be an option. And there are plenty of errors businesses in the sector can make

“The biggest mistake you can commit while running a RegTech company is not to think outside the box and not going beyond limits and conventions,” says a spokesperson from Electronic IDentification, the RegTech company. “Creativity and constant quest for broadening are crucial in order to be a RegTech. You will no longer be considered a RegTech if you are not ahead of changes. That’s the philosophy of being an X-Tech company.”

The Electronic IDentification spokesperson adds that RegTech solution providers sometimes fail to stay abreast of both the latest regulation and technology. “These two words compound RegTech, so being one means to be ahead in these two areas,” the spokesperson said.

“Anticipating regulatory changes means being constantly monitoring institutions and to be prepared for what is going to happen. RegTech solutions must be upgraded regularly so that they comply with the newest and most demanding regulations of all sectors of activity. It is also important that its structure is versatile so that it can be easily upgradable. AML5, next AML6, eIDAS and SCA represent a strong compliance framework to have in mind.”

Remonda Kirketerp-Moller, founder and CEO of RegTech company Muinmos, has noted a similar trend among the vendors in the industry. “I am increasingly seeing a lot of organisations jumping on the RegTech bandwagon, launching new RegTechs which claim to do everything, yet don’t have a specific area of focus or solve a particular issue,” she says. “This is a real problem and is potentially very damaging to the RegTech sector.”

This, she argues, could damage the industry’s reputation. “When financial institutions sign up with these RegTechs, they often end up disappointed by the lack of robust technology to make their entire compliance function more efficient,” Kirketerp-Moller suggests. “When credible RegTech firms which have been investing in and developing niche solutions for many years approach these financial institutions it then becomes a much ‘harder sell’ as we are approaching financial institutions which have had negative experiences of partnering with some RegTechs. The RegTech firms claiming to do everything or not doing what they are claiming to do well are hugely detrimental to the RegTech sector.”

Of course, regulators such as European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has taken steps that can assist the creation of great RegTech solutions.

“ESMA has been very prescriptive in its guidelines issued in summer 2020 and has recommended that the compliance function is allocated sufficient IT resources and a technology budget that is consistent with the level of compliance risk the financial institution is exposed to,” says Kirketerp-Moller.

“Compliance teams mustn’t make the mistake of believing that they can find a single RegTech organisation which claims to do everything. They need educating about the various options available to them and what inefficiencies and problems they are trying to solve for their financial institution so they can then make more informed choices, selecting RegTech products which meet specific needs to enhance their in-house capabilities.”

Another common mistake is to simply wait for change. “Waiting for governments, administrations and institutions to develop new regulations that will boost key aspects of industries is sometimes discouraging, so leading RegTech companies should accompany and push them to trigger changes that will boost society,” the spokesperson said.

“Same happens to technology. RegTech companies should not wait for technology advances to integrate them into their solutions but create new. Research, development and innovation efforts must be set in the core of any RegTech.
A pursuit for the infinite enhancement, expansion and opportunity.”

Another mistake is to be too narrow in their approach. “RegTech solutions should not only serve compliance needs but boost sales, user experience and productivity of companies that implement them,” the Electronic IDentification spokesperson says.

Originally published on FinTech Global.