Global investments in regtech companies reached $9.2 billion, and some deals exceeded $100 million according to global fintech research. The total deals and funding beat the numbers from 2019 ($6.8 bln) and 2020 ($8 bln). So why are the regtech companies in such high demand right now? And what will the future look like?
First, let’s take a look at the largest recent exits in the industry. Of course, the biggest checks in the industry belong to the US-based companies. This summer, passwordless authentication company Transmit Security raised $543 million in Series A funding, which will be used for scaling and new market expansion. It was the biggest round ever for a cybersecurity company.
Canadian startup Trulioo raised $394 million this summer in Series D funding. The round was led by venture capital firm TCV. Investors saw rising demand for online identity verification solutions from online marketplaces and financial services, so the money was intended to increase the company’s market share.
US-based cloud security company Sysdig raised $189M in Round F recently to expand their R&D, marketing, and sales. Third Point Ventures and Premji Invest led the round. One of the reasons to invest was Gartner’s prediction that the public cloud market will reach $304.9 billion in value this year (which is almost $100 billion higher than last year).
If we are talking about deals in Europe, then there are comparable checks when it comes to late rounds and smaller checks when it comes to early stages (like Round A). To give an example, there is the AI-based SaaS tool Shift Technology, which raised $220 million this spring in Series D.
The most recent deal is identity verification service GetID, acquired by Swedish company Checkin.co for $9.5M. The acquisition was made to level up the speed of identity verification, reduce friction during the onboarding process, and increase compliance and other industry-related technologies.
Another noticeable player in the market, Onfido is now preparing for an IPO. The Telegraph reported that Onfido has begun adopting US accounting standards in preparation for the move. Now the company is valued at $479 million.
Why is the regtech industry so attractive for investors?
“Investors are continuously looking to solve compliance issues, make onboarding of the new clients fast, secure and effective. New AML-regulations make it harder and harder to stay compliant. Also, the world pandemic made many services shift online which significantly increased the demand for online identity verification and automated solutions,” – Dmitri Laush, CEO GetID.
Another reason for this is the high rate of identity fraud, which increases from year to year. Identity fraud incidents increased around 45% last year (FTC data), incurring financial losses for many. According to the FTC, reported losses grew from $1.8 billion in 2019 to $3.3 billion in 2020.That is why the demand for the companies fighting identity fraud (including different regtech solutions) has increased.
In addition, automated KYC solutions can make onboarding easier for new clients, which can increase conversions and reduce churn rates as well as the number of dropped transactions.
According to a recent Fenergo survey, 81% of C-suite executives at banks believe poor data management lengthens onboarding and negatively affects customer experience. That is why banks (and other financial services) are constantly looking to invest in revolutionary regtech technologies. Automated solutions based on AI and machine learning can eliminate all the human errors and speed up the process.
What will the future bring?
Cybersecurity companies will stay in the spotlight for the investors. Top investments in 2021 were made in this sector (e.g. Transmit Security deal). Cybercrime has always been a risk for many industries.
Another attractive type of business in the regtech industry is KYC and identity verification solutions, and it might stay this way. The biggest investment rounds outside the US were raised by these types of companies.
Artificial intelligence and machine learning-based technologies make the regtech market mature and evolve. Investors are looking to upgrade those technologies in the existing companies or invest in the innovative technology based on AI.
There is no doubt that the sector will just grow and become more attractive for VCs and angel investments. According to Allied Market Research, the regtech market is projected to reach $28.33 billion by 2027, growing at a CAGR of 22.3% from 2020 to 2027.
The potential of the industry is truly huge, giving equal opportunities to both investors and players alike.