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Reality check: Getting real with RegTech

It seems like everyone’s jumping on the RegTech bandwagon, it’s been referred to as“the new FinTech”,“the sexiest part of FinTech”, abook is being written on it and even regulators such as the FCA are saying that they “want to encourage RegTech adoption”.

It’s the perfect storm – never have financial institutions (FIs) been confronted by such a tsunami of new regulation, nor has the regulation ever been so complex. Combine this with increased staff costs, the rise of passive investment and fees being squeezed and it is clear that FIs large & small are now looking to RegTech to solve all their worldly woes.

Many have come to the shocking realisation that just hiring more bodies and sticking them in front of Excel sheets is not a sustainable solution. But in the process of looking for, evaluating and purchasing a RegTech solution many financial institutions are confronted with some new realities.

Reality 1

You cannot rely on prime brokers / consultants any more for up-to-date vendor information.

Back in the slow moving days of the 90s and 00s, lists were maintained of “preferred vendors”. The lists didn’t change very often and the consultants built up cosy relations with those vendors (boozy lunches anyone?). Fast forward to today, and a FI is more likely to find a RegTech solution just by googling.

Reality Check: Use consultants and trusted sources as usual, but also embrace modern sources for information.

Reality 2

The old procurement process of issuing Requests for Proposal (RFPs), checking balance sheets etc. is completely outdated.

Just googling “No RFPs” will illuminate why RFPs are dreaded by most modern software companies. They are enormous documents with hundreds of questions, of which generally 10% will be relevant to the issue at hand. Large old-school vendors will have entire teams whose sole job is to fill in RFPs, and as they say onnorfps.org "An RFP will only show you how good a vendor is at writing an RFP response, but won't necessarily yield the best vendor". Yet many (particularly larger) FIs insist on them, ensuring younger companies will never get a foot in the door, potentially missing incredible high tech solutions to various issues.

Likewise, up until fairly recently, strict demands like “5 years audited accounts” were commonplace, ensuring that even relatively mature startups would fail at the first hurdle - neither being old enough nor having enough revenue to have “audited” accounts.

Reality Check: Develop robust but commensurate processes for evaluating “new” vendors. Intensive workshops and Q&A sessions are far more effective than wordy RFPs in aiding decisions.

Reality 3

Comparing SaaS proposals to on-premises perpetual licenses needs context

Most RegTechs deliver SaaS, with a single yearly fee (say 150k / year). Older software companies will quote a license fee for perpetual use (say 500k). Immediately a FI will say “Well after four years the perpetual license is much cheaper”. This is the first logical trap and where large FIs really struggle to work out their true Total Cost of Ownership (TCO).

What’s not included in the on-prem £500k is support (20% of license / year), upgrades & consulting (50k / year), server & database licenses (10k / year), IT staff costs (100k / year) etc. etc. Which already amounts to a true five year TCO of £750k for SaaS vs. £1.8 million for non-SaaS. Ditto apparently “free” in-house developments often carry a massive TCO once all the numbers are added up.

Reality Check: Try and work out true TCO for existing processes before comparing to on-prem or SaaS models.

Reality Bites

The good news is that more and more FIs are getting savvy in dealing with RegTechs and have modified their procurement and implementation processes to deal with the modern marketplace. Likewise many startups are upping their game to deal with FIs - improving processes, documenting all parts of their business and ensuring world-class security levels and overall it has all the hallmarks of a very symbiotic relationship.

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