Over the last decade, a raft of new financial regulations and the digitization of financial services fueled the growth of the regulatory technology (“regtech”) industry. Under Trump, regtech firms continued to attract VC capital and scale their businesses, despite the “light-touch” approach to financial regulation of the former administration
With Biden and the Democratic Party now in control of the government, regtech insiders expect a tougher stance towards financial services from Washington, D.C., and for the regtech boom to accelerate. Here are their three biggest predictions for the regulatory environment and the outlook for regtech over the next four years.
The CFPB is back
Experts agree that the Consumer Financial Protection Bureau (CFPB), a federal agency created in 2011 to police deceptive lending practices, will ramp up enforcement and raise fines to Obama-era levels.
The Trump administration significantly pared back the CFPB’s activity, with overall enforcement activity plummeting by 80% and fines decreasing by 96%, according to a 2019 report by the Consumer Federation of America.
“I think we’ll see a stronger CFPB under the Biden administration,” said Joe Robinson, CEO of Hummingbird, an AML-focused regtech. “And in terms of lending in general, aside from the policymaking discussions, we’ve seen an explosion of lending in the fintech space, with lots of interesting ways to help people access more capital. On the lending side, there’s a lot of work and innovation being done.”
Rohit Chopra, Biden’s nomination to lead the agency, is a favorite of progressives who previously served as the CFPB’s student loan ombudsman during the Obama administration. Chopra is expected to enforce fair lending laws, crack down on payday lenders, and strengthen enforcement of Dodd-Frank. Chopra will also renew the agency’s focus on lower-income communities, which are especially susceptible to predatory lending activities.
“I anticipate key priorities for the Biden administration will likely be to increase the role of the CFPB, increase transparency in lending decisions and a stronger focus on lending in communities of color,” said Mark Flamme, who leads the North America Fintech practice at AlixPartners, a management consultancy.
A more muscular CFPB will be a headache for private firms, but it presents a potential boon to regtechs that can help lenders self-regulate, keep compliant and stay in the good graces of Biden’s Justice Department.
Cryptocurrency regtech is a goldmine in waiting
The explosive growth and mainstream acceptance of bitcoin is taking Wall Street by storm, but crypto startups and their financial institution collaborators are treading lightly as new Biden cabinet members and financial officials take over the government.
Over the last four years, Trump appointees pushed through several crypto friendly directives. For instance, the Office of the Comptroller of the Currency permitted banks to transact with stablecoins and provide crypto custody services, while the Commodity Futures Trading Commission signed off on new crypto derivatives products.
Biden is unlikely to roll back all of Trump’s directives on cryptocurrencies. But the industry is likely to face greater scrutiny.
“The Biden regulatory agenda will work to implement enhanced regulations over fintechs, cryptocurrency and data privacy,” said John DelPonti, a leader in Berkeley Research Group’s Financial Institution Advisory practice.
Comments from Janet Yellen, the new Treasury Secretary, capture the new administration’s ambivalent attitude towards the crypto space. “The misuse of cryptocurrencies and virtual assets is a growing problem, too,” said Yellen at the Treasury Department’s innovation roundtable event last week. “I see the promise of these new technologies, but I also see the reality: cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.”
As the crypto industry matures – both in terms of technological sophistication, and the number of respected institutions entering the space – the sector’s demand for top-notch regulatory technology services will continue to grow, particularly as the Biden administration takes a tougher stance.
“I believe there are great opportunities in the cryptocurrency, digital assets space,” said Rick McDonell, Executive Director at ACAMS. “This includes regulatory requirements on virtual asset service providers but also the so-far nascent rollout of central bank digital currencies and how it will work operationally.”
Regardless of regulatory scrutiny, the number of crypto users is poised to continue growing, with banks like Deutsche Bank predicting crypto will be “mainstream” within a matter of years. As such, the opportunity for crypto-focused regtech providers is massive.
AML will remain a focus
Anti-money laundering (AML) is one area of the financial regulatory arena that wasn’t scaled back under Trump. Cracking down on terrorist financing and other illicit flows of capital will remain a key focus of financial regulation under Biden, paving the way for continued growth of AML regtech service providers.
“Traditional notions of ‘anti-regulation conservatives’ and ‘pro-regulation liberals’ just don’t hold water in the context of money-laundering and tax evasion,” said Meredith Moss, CEO and Founder of Finomial, which provides AML services to financial institutions. “Regtech for AML/KYC is transforming from a nice-to-have to a must-have. This is a continuation of the trend under the Trump administration, not a change that is heralded with a Democrat in the White House.”
For instance, the 2020 Defense Authorization Act, which passed with bipartisan support, including “new and large-scale AML/CFT requirements and reforms” that will further the demand for AML-focused regulatory technologies, according to McDonell.
“This is likely on the one hand to deliver some efficiencies but on the other to require more regulatory information, particularly corporate beneficial ownership information,” said McDonell. “I believe there will be significant regtech niche opportunities in that space.”
To that end, the Trump administration also passed the bipartisan Corporate Transparency Act, which requires US and non-US entities filing to do business in the US to disclose their controlling persons and beneficial owners – another boon to AML regtechs.
But legislation and politics aside, a consequence of the COVID-19 pandemic – namely, the corporate world’s growing impatience for clunky digital services – is likely to buttress AML regtechs for years to come.
“Client expectations for a digital experience have accelerated under COVID, and patience has run out for financial institutions that ask the same client repeatedly for the same information and the same documents,” said Moss. “Regtech is the only way to effectively address elevated expectations from clients.”