Covid-19, which has accelerated the adoption of digital technologies in financial services, is also catalyzing the rapid growth of the regtech industry in Asia-Pacific. However, the sector faces the difficult challenge of bridging the divide between developed and developing economies in the region, a new report says.
Regtech, or regulatory technology, uses digital tools to help firms comply with regulations, such as in the areas of compliance and risk monitoring. Its services have become increasingly relevant in view of the widespread use of digital technologies in the financial sector, which coincides with the rising incidence of fraudulent activities such as data theft, money laundering, and ransomware attacks.
While most regtech firms have been established in the United States or Europe, Asia-Pacific is expected to become the new engine of regtech growth and innovation in the future, according to the report released by Enterprise Ireland, the Irish government’s trade and innovation agency and a major venture capital investor in fintech. Factors include the rapid development of emerging markets and financial systems, increased investment in new technologies and digital transformation, greater regulatory acceptance, and extensive infrastructure development in the region.
The report, entitled The State of Regtech in APAC, analyzes the adoption of regtech across 10 key markets in the region – Australia, mainland China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. Enterprise Ireland commissioned Asian fintech market researcher Kapronasia to develop the report.
Rapid market growth
The global regtech market is forecast to grow from US$6.3 billion in 2020 to US$16.0 billion by 2025, a rate of over 20% per year, with APAC expected to have the highest growth rate over the period, the report says, citing data from market researcher ReportLinker.
The projected growth of the sector is in tandem with the booming fintech scene in the region, particularly in Southeast Asia which saw an estimated US$1 billion worth of investments in 2019, World Bank data show.
While APAC is home to some of the world’s major financial centres, the non-homogenous region demonstrates varying levels of market development. In developed economies such as Hong Kong, Singapore, Sydney and Tokyo, regtech uptake is driven by a sophisticated financial ecosystem and a complex regulatory environment.
The need for governance and accountability, the emergence of new market participants and security concerns arising from disruptive technologies such as artificial intelligence and distributed ledger technology give regulatory impetus for regtech adoption, the report says.
This contrasts with developing economies where regtech uptake is driven by the sector’s promise in helping to create financial inclusion. Uptake is also reliant on business cases and under-resourced regulators in these markets. As such, demand for regtech solutions in these economies is not as strong as in the developed markets. This can be attributed to regulatory inertia and a marked difference in fundamental behaviours and attitudes towards regtech.
Differing regulatory drivers
Developing economies however stand to mature over time – while technology ecosystems in developed and developing economies will continue to evolve at an increasingly varying pace, given differing regulatory drivers for regtech adoption. This is especially evident in the wake of the Covid-19 pandemic which has further reinforced differing domestic priorities and exacerbated the economic and technology gap in the region.
“Covid-19 compelled financial services sector to see the value of digitalization as a necessity. It has become a way for organizations to improve their services in response to changing business and consumer needs,” says Mo Harvey, Enterprise Ireland’s financial services and fintech lead for Asia-Pacific.
Moreover, the rise of digital banks, P2P lending, digital assets and remote onboarding present an opportunity for regtechs to fill the need for specialized solutions.
The rise of new technologies and entry of new players in the financial sector, meanwhile, have made the job of regulators even more challenging as the new environment has increased the risks from data privacy breaches, money laundering and other fraudulent activities.
Top cyberattack target
The global cost of cybercrime is estimated at US$600 billion annually, with approximately US$160 billion coming from APAC. Asia appears to be the world's most targeted area for cyberattacks. Hackers are 80% more likely to target organizations in Asia, yet organizations in the region take 1.7 times longer than the global average to discover cyber breaches, probably because more than 60% of Asian companies do not have proper cyber threat monitoring systems, the report says.
In the wake of recent events such as the 1MDB scandal in Malaysia, regulators across the region have tightened reporting requirements and put more pressure on financial institutions to determine beneficial ownership and enhance screening requirements.
The projected cost of anti-money laundering compliance across Indonesia, Malaysia, the Philippines, and Singapore combined is estimated at US$6.09 billion annually, with more than half of it in Singapore. Average compliance costs were expected to have risen in the Asean region by 9%-10% in 2020.
All this presents enormous opportunities for regtech firms in the region. “Regtech is a secret sauce that empowers financial institutions, fintechs, virtual asset service providers and beyond. All such institutions, and their regulators and users, across the Asia-Pacific benefit from innovative, efficient and cost-effective regtech solutions to combat financial crime and drive efficiencies and financial inclusion, regardless of origin of such technology solutions,” says Brian Tang, co-chair of the Fintech Association of Hong Kong’s Regtech Committee and co-convener of the APAC RegTech Network.