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The year 2018 was a milestone for the Regtech industry as the importance of AML/CTF compliance was acknowledged globally. As Regtech went mainstream, the year saw a series of conferences that focused on the diverse regulatory landscape and the role of technology in compliance.
With the demand to keep up with regulations remaining higher than ever, companies and SMBs are looking for solutions in regulatory compliance. In the driving seat are startups that are releasing innovative products and solutions focused on the automation of compliance functions.
Regulatory pressure shows no signs of weakening, and businesses are quick to adopt new trends in AML/CTF compliance rolled-out by innovative Regtech startups.
Here’s a close look at the top 10 trends to watch out for in 2019. What is predicted for the Regtech industry this year? What are the key drivers that will power Regtech innovation? Which trends in AML compliance will prevail in 2019?
1. Identity Management will dominate Regtech solutions
Rising identity theft and fraud risks have reinforced that KYC procedures cannot be standalone measures of AML compliance. Automated checks facilitate faster results for validation of high-risk individuals or entities.
The need for ongoing compliance and detection of red flags for prevention of identity fraud has created a huge space for customised solutions and services in identity management. This trend will dominate the Regtech industry in 2019, as fines and penalties from wrong business decisions or frauds are huge.
2. Sanctions will get more complex
In 2019, the momentum of sanctions is expected to continue with a further collection of sanctioned countries and entities to strengthen the culture of compliance. This will compel companies to tap new screening methods and software to better their everyday compliance strategy. Businesses will turn to automated screening services that use sophisticated methods for checking global sanction databases.
3. Fraud management will witness high use of AI and blockchain
The traditional rules-based approach to AML will be replaced by sophisticated technologies like AI and blockchain for improved accuracy in fraud management and saving of resource spend on weeding out false positives. AI can detect patterns in the data and adapt to changes in criminal behaviour seeking to evade detection. So, 2019 will find pervasive use of AI in fraud detection that runs together with KYC and AML systems. The success of blockchain in monitoring complex transactions for visibility and alerts across the system, will find the increased deployment of blockchain for fraud management.
4. Innovation in Regtech will hit an all-time high
More and more start-up offerings are expected to hit the market in 2019. Innovative niche solutions like transaction monitoring software platforms, sanctions screening services on-the-go and crypto AML softwares will set the trend.
5. Demand for new job roles specialised in AML/CTF compliance
As AML compliance becomes critical to business and financial operations, 2019 will be the year of new job roles that retrofit companies for compliance functions. Some of the new job roles expected to power hiring functions are compliance officers, digital ethics officers, sanctions professionals, AML specialists, KYC compliance manager/officer, Regtech data and analytics associate, and compliance supervisor. The traditional CTO (Chief Technology Officer) will no longer be the lone go-to person for compliance. They will be supported in their functions by specialised compliance and sanctions professionals.
While financial firms will add compliance experts to their team to keep up with the relentless changes in regulations, there will also emerge institutes that specialise in training these professionals.
6. Crypto regulation guidelines will be more sweeping and detailed
The year 2018 witnessed the first forays into crypto regulation, with the 5th EU AMLD bringing cryptocurrency exchanges and custodian wallet providers under focus. EU, Japan and Australia sought to regulate cryptocurrency exchanges. However, most other countries are yet to take a call on the legality of cryptocurrency or the functioning of digital currency exchanges. The year 2019 will however be a milestone in crypto regulation, as most countries will finally acknowledge the role of digital currencies in the financial system. One can expect a string of AML guidelines issued by regulators across the world, and treating cryptocurrency exchange businesses on par with money remittance providers.
7. Regtech Sandboxes will find wide adoption
The success of Regtech Sandboxes for a structured testing of innovative Regtech products has found popularity among both, Regtech firms and regulators. The year 2018 will find wide adoption of sandboxes as they allow customers to fine-tune their requirements for dedicated source testing and customised reports. Cross-border sandboxes will also find favour with regulators and companies as they collaborate in the promotion of new technologies and business models in regulatory compliance.
8. Investments in Regtech will grow steeply
According to the Report by Markets and Markets, the Regtech industry is expected to grow at a CAGR of 23.5% to become a USD 12.3 billion market by 2023.
Financial institutions and regulated businesses become proactive in their compliance rather than reactive by paying huge penalties. Therefore, they will invest more in automation of regulatory compliance and seeking third-party services for multiple compliance functions. This will power the steep growth of the Regtech industry with new products and solutions.
9. Open banking will create more opportunities in Regtech
With the PSD2 and GDPR, the KYC and AML regulations for financial institutions became more complex. However, the innovation capabilities of Regtech in the open banking system can reinforce AML compliance of banks. So financial institutions will partner with Regtech firms for standardisation of APIs, building a regulatory framework when banks use third-party financial service, conduct OCDD and KYCC (know your customer’s customer), to maintain compliance on both fronts of PSD2 and GDPR.
10. Regulatory Intelligence emerges as a new concept
As the automation of AML compliance becomes the need of the hour, businesses and financial institutions will look at “intelligent” solutions that move beyond the silo Regtech solutions to a more intuitive and inclusive long-term approach.