Tech to account for over half of regulatory compliance spending

Technology spending will account for more than half of organisations’ compliance budgets as the regtech revolution gathers pace.

As more and more non-bank businesses offer financial services, regtech will be in high demand. In fact, global spending on regtech will increase from $68bn in 2022 to reach $204bn by 2026, according to Juniper Research.

Juniper said integrating regtech with banking-as-a-service (BaaS) models will see spending increase significantly.

Non-banking businesses such as retailers, e-commerce companies and distributors are increasingly looking to offer their customers financial products and are taking up BaaS offerings to enable them to do so.

Juniper said BaaS models include outsourcing regtech services such as digital onboarding, and it found that 26% of digital onboarding processes in the banking market will use artificial intelligence (AI) systems by 2026, compared with just 8% in 2022.

Juniper research author Harshada Thok said: “While the current benefits of AI are clear to regtech vendors, the immediate focus must be on ensuring the algorithms are fed the most relevant data to maximise their efficiency in verifying digital identities and future use cases. In turn, this will provide a differentiation point for regtech vendors in an increasingly competitive market.”

According to recent interviews with 50 senior business executives and a survey of 1,600 more, carried out by financial IT software supplier Finastra, 85% are already implementing banking-as-a-service capabilities or plan to do so in the next 18 months.

But to provide these services, they need to be regulated and have access to expensive banking tech, so businesses are instead using financial services offered by banks and fintechs. The application programming interface (API)-driven services are regulated through the bank, which also provides the tech infrastructure.

Although the finance sector dominates regtech, demand from new customers of the technology will emerge. According to Juniper, the next growth areas in regtech will be in the healthcare and gambling sectors.

“Regtech vendors must provide verification services in emerging areas where compliance is being disrupted, such as cryptocurrency exchanges, digital healthcare and online gambling,” said the research company.

“Impending changes to regulations in these markets will provide significant opportunities for regtech vendors to broaden their focus beyond financial markets to capitalise on new addressable user bases.”