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RegTech market episode 2: a look at financial systems

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State-of-the-art analysis

This second blog post about the RegTech market is focused on the Italian and European financial systems, with a special focus on the types and distribution of financial institutions. In the previous post of our blog series, we have introduced this growing business area, focusing on the general situation regarding the current dimensions and the positive trend of this increasing market called RegTech.

Italian and European financial systems

The European banking system is a huge economic field. In August 2020, the sector counted 4.419 credit institutions only in the Euro area, while in Italy the credit banks amounted to about 480. The most of the Italian institutions are small or medium-size, with a quite limited penetration of foreign institutions.

Limiting our consideration to the so-called significant banks of the main European Countries – based on the European Central Bank’s definition -, is evidenced that these institutions are much more exposed to the compliance costs, but they also have larger resources to face these costs. As we have highlighted in our previous post, this business area is quickly and constantly growing, pointing to big opportunities for hi-tech providers like Aptus.AI. Anyway, also all the other financial entities are affected by financial regulations, such as less significant banks, financial companies differing from credit institutions, legal field professionals. This market is really a fertile ground, at all levels.

Mergers and full digital banks

This trend goes with the fact that, in the last few years, the whole system has been affected by a strong aggregation process for the optimization of the costs and the enhancement of the support functions to the operations, in order to face the growing operating margins reduction. This is one of the reasons why many big traditional banks have recently merged. Just as an example for the European area, we can mention the merger between Intesa SanPaolo and UBI Banca, or also the ongoing OPA of Crédit Agricole on Creval.

These mergers are accompanied by another trend, which is the operations digitisation, also at the base of the progressive restriction of the operational functions dimension. Full digital banks are constantly growing in number and size, as reported in this detailed and extensive article by sifted.eu, where their dimension, geographical distribution and number are clearly highlighted. These so-called neobanks are currently almost 300 and they will continue to grow at least in 2021, surely giving additional fuel to the RegTech market engine.

But money isn’t everything…

So, just to sum up. On one hand, big European financial institutions are following a merger trend, which allows them to have more resources to invest also in RegTech solutions, as they seem to be the most cost-effective way to face the growing compliance costs and to save time for human added value activities. On the other hand, neobanks are quickly growing and they surely will invest in RegTech products, as suggested by their digital nature. But that’s not all.

There are many other trends which clearly point to RegTech as the future big deal. For example, all of these institutions are more and more open to outsourced providers for hi-tech products. Besides, these solutions enable to increase the general efficiency of all the operational processes – not only regarding compliance. Then, also the top-management staffs have become aware about RegTech, being also conscious that this sector is expected to “Enhance strategic decision making for the risk and compliance function” (first goal), “Increase accuracy of regulatory reporting” (second) and “Facilitate compliance function tasks” (third; source: Thomson Reuters 2021 Report).

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