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#25 – 2023 Trends Special

To wrap up the year, usual host Claus Christensen looks at key RegTech and financial regulation trends we have observed in 2022 and shares predictions for 2023 with the help of Know Your Customer’s Head of Marketing Maggie Maspero.

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Episode Notes

While 2022 hasn’t been an easy year on the global stage, the world of RegTech has witnessed some strong consolidation in multiple areas.

Know Your Customer’s Head of Marketing Maggie Maspero sits down with CEO Claus Christensen to discuss:

  • What makes the RegTech sector a recession-proof area of investment
  • What new industries are likely to embrace RegTech innovation in 2023
  • What the future holds for UBO registers in Europe
  • What RegTech vendors are most likely to succeed in 2023
  • How the use of AI in RegTech is likely to evolve
  • Why we should talk about preventing money laundering in the Metaverse sooner rather than later

Links to articles mentioned in the episode:

RegTalks is a podcast produced by Margherita Maspero for Know Your Customer.

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    Episode Transcript

    Maggie: Welcome to RegTalks, a podcast dedicated to the latest trends from the world of RegTech, Fintech and financial regulations. My name is Maggie Maspero and I’m the Head of Marketing at award-winning RegTech provider Know Your Customer. Just for today I will be your host and for a change the one answering all the questions will be Know Your Customer’s CEO and co-founder Claus Christensen. I want to ask him some questions on key trends in the KYC and RegTech space for 2023.
    Claus, thanks for your time and thanks for being here. 

    Claus: My pleasure, Maggie and great to sit on the other side of the table. 

    Maggie: Let’s start from that. What kind of year would you say that 2022 has been for the world, but especially for RegTech? 

    Claus: It certainly wasn’t an easy year on the global stage in any way, but if we look at the world of RegTech specifically, we can see a strong continuation of the tidal wave of general RegTech adoption which had begun with the pandemic in 2020. Right now all the efforts of various regulators promoting the use of RegTech by their financial sector and also the time and funds invested by RegTech providers are paying off at the same time. 

    Maggie: That’s great, and would you say that the global investors community agrees with this? 

    Claus: Absolutely. In fact, the view of RegTech as a sound investment becomes clear if considering the main purpose of this technology, namely increasing the efficiency in compliance operations. That is something that companies seek in any economic climate. In times of growth, manual processes hinder scalability, and so they need to be replaced by automation. But automation is also key in times of economic downturn, as companies are under pressure to optimise resource allocation to reduce overall spending. Plus, the function of regulatory compliance in firms is not something they want to be found to have cut first, or ever. 

    Maggie: OK, so what you’re telling me is that RegTech is arguably a recession proof sector. But if we look at the adoption side, how many sectors are actively embracing this type of technology? Would you say it’s still only banks or are things changing there? 

    Claus: What I see is that the opportunities of RegTech for regulated verticals are finally fully accepted. But beyond the strictly financial sector, we’re now also serving clients in energy trading. I think that trend will continue and include even further sectors with strong supply chain management needs like aerospace and medical. 

    Maggie: You know, being the one who looks after marketing here and Know Your Customer, I had the chance of working on some very exciting client announcements this year. We announced the likes of Aspire in Singapore and Tricor in Hong Kong and more recently we announced Lambert Smith Hampton in the UK and Ireland. The Aspire announcement in particular was a great opportunity for us because we celebrated it with an official signing ceremony with Taoiseach of Ireland at the time, Micheál Martin. Then, during Singapore Fintech Festival, we had the pleasure of welcoming at our booth Leo Varadkar, who at the time was the Vice Prime Minister of Ireland as well. So that wasn’t bad for you. Meeting two Irish Prime ministers in less than three months. 

    Claus: Indeed a very cool moment for me, especially as a relative newcomer to Ireland. But it is actually a continuation of the early experience that my Irish co-founders and I had with the support of another brilliant organisation of the Irish Government, Enterprise Ireland. EI is a very active early stage VC and we were fortunate to receive their backing and support since our early days. 

    Maggie: They’ve been incredibly supportive of us also in Asia Pacific, or especially in in the Asia Pacific region. This gives us a nice opportunity to focus on Ireland and Europe for a second, and I want to talk about the recent decision by the Court of Justice of the European Union on UBO, or Ultimate Beneficial Owners, registers. I’m sure everybody has heard of this, but in case you haven’t, the court ruled that providing public access to ultimate beneficial ownership registers is a violation of privacy and data protection. And so, as a result, the requirement that Member States provide and maintain open UBO registers was deemed invalid. Various countries have already taken the registers offline, and it’s likely that many more will follow. What is your prediction there? What do you think will happen? 

    Claus: Well, in a way I see this as an epic battle between two competing pieces of regulations within the EU. On one hand, the AML directives, and the General Data Protection Regulation (GDPR) on the other. At least for the time being, GDPR seems to have come out on top, but I don’t think the game is over just yet. In my opinion, there is a wide consensus across the bloc to increase rather than decrease corporate transparency. 

    Maggie: In the meantime, what options do compliance teams or even just members of the public have if they want to investigate a corporate structure, or if they want to identify UBOs, both in Europe and globally? 

    Claus: I never thought that the introduction of UBO registers would be the best way to implement the Financial Action Task Force (FATF) recommendations anyway, but while we wait to see how the situation will further evolve, traditional company registries are the most useful resource here. And if we look at the European Union alone, national company registries in all 27 Member States provide vital information that can be leveraged to unravel corporate structures. 

    Maggie: Of course, that’s great for European countries, but what happens if a company registered in, let’s say Belgium, is then owned by a company in China? 

    Claus: Well, actually European countries are not the only ones to store this type of information in their registries. In line with recommendations by the Financial Action Task Force, a constantly growing number of countries are providing these details already via their local registry rather than separate UBO registers. At Know Your Customer, we provide access to registries in 127 countries globally. Of these 127 registries, 85% provide official and reliable information on controlling entities and individuals for companies, while 65% also provide information on shareholders, partners and beneficial owners. 

    Maggie: Not everyone is fully aware of the amount of information that can be accessed using traditional registries around the world. For anyone interested in learning more, we recently published an article in Finextra on this exact topic.  

    Let’s go a bit broader now as I’d like to talk about the key trends that you see in the global RegTech market overall. In fact, the use of RegTech is exploding, but at the same time, the number of vendors has grown considerably. There is, for instance, the RegTech100 list and we know that this year Fintech Global received 1300 applications for it, which is an incredible number. On one hand, this makes us very proud of being included because competition is fierce and probably will remain so for a while. But on the other hand, it also shows how the number of providers continues to grow as more regions see the value of RegTech innovation and the demand side continues to expand. How sustainable do you think this is? What’s likely to happen in 2023 in this area? 

    Claus: Well, first of all, RegTech is obviously much broader than KYC and anti-money laundering, which is the part that we concentrate on. I’d say the number of submissions is more an indication of the widening of tech applications in compliance. In our subcategory what I see is that smaller vendors are struggling to be heard above the noise and struggling to integrate with enough legacy systems to be truly useful for clients. On the other hand, established larger vendors need to accelerate development or lose out against the faster, smaller competitors. So, I expect more consolidation to come. My prediction is that the market will move away from point solutions that only solve one small problem, and we’ll also leave behind big monolithic solutions that are just too inflexible. Providers with modular solutions that can be reconfigured on the fly to apply to many verticals will be the ones to prevail and move up the value chain. 

    Maggie: Yeah, it’s a good point and the concept of modularity in RegTech is definitely gaining momentum. Let’s get a bit more granular. Let’s talk about the applied use of artificial intelligence in our sector. How would you say that is going at the moment? 

    Claus: I believe the use of artificial intelligence and machine learning in RegTech is now going beyond the buzzword phase. In the early days, the underlying assumption was that you could just replace human decisions with a machine learning model trained by a set of previously made human decisions. That simplistic approach can result in huge efficiency gains, but for a price. For example, racial bias embedded in training sets can be a huge problem, so training data security considerations will get much, much wider. Most importantly, you can’t remove human accountability in an area where the financial institution’s accountability to the regulator is fixed by law. At the same time, AI as a technology is ubiquitous today and it has matured. We will see more use of machine learning in RegTech, but it will be more targeted to where it makes sense, where it is safe and where vendors can ensure ethical AI implementations. 

    Maggie: You mentioned that with AI we are finally going beyond the buzzword phase. If we think of the other buzzwords that have characterised 2022, I would say “Metaverse” definitely makes it onto the podium. From your point of view, what are some of the implications of the Metaverse, specifically in relation to anti-money laundering, that we should start thinking about? 

    Claus: As the Metaverse keeps gaining speed, the need for digital identity and KYC or KYB processes that are fit for purpose will only become more pressing. The opportunities for abusing the Metaverse and its unlimited system of commerce are much higher and even more impressive than the opportunities for growth we get by connecting all of humanity in one fair and open system. Considering all of this, shouldn’t we establish a global financial regulator for the Metaverse to get ahead of the upcoming changes? 

    Maggie: There you go, so you have preempted your own final question that you ask all guests, which is what you’d do as a global financial regulator. In your case, that’s having a special division fully dedicated to supervising and protecting the Metaverse against money laundering exploitation.  

    Claus: Exactly, and it’s neat how we reverse the final question back to the interviewer here. 

    Maggie: Exactly, and we also have an article where we gather all the answers that our 20+ guests have given us in the last two years, so I’ll post that in the notes as well if anyone is interested and wants to see the variety of answers that we got over the years. 

    Claus: Oh, very cool. 

    Maggie: Well, Claus, this has been great. Thanks so much for talking to me about upcoming RegTech and AML trends for 2023. 

    Claus: Thank you very much for interviewing me. I look forward to swapping places again and asking questions next time.  

    If you liked the episode please subscribe to the whole series and leave us a review. And if you’d like to connect with us, suggest a guest or a topic for an upcoming episode, please send us a message at info@knowyourcustomer.com.