How a $10.6Bn Market in 2017 Will Reach $75Bn by 2022
Crypto Technology Will Reinvigorate the RegTech Landscape
RegTech spending, as a percentage of regulatory spending, will increase dramatically, from 4.8% in 2017 to 34.4% by 2022. With multinational financial institutions such as Citi having as many as 30,000 compliance staff, just 3 bank compliance departments could fill London’s Wembley Stadium. This level of staffing means that a 50% reduction could save a single large bank $1.2 billion per annum, based on average wages. To give some additional context, the RegTech market stands at $10.6Bn in 2017, and is predicted to grow at a 48% CAGR, to ~$75Bn, by 2022.
Driving this increase in demand is the need to reduce Paper, PDF and Spreadsheets (PPS) from the mid- and back-office, and replace these archaic practices with digital, auditable workflows, hosted on the cloud, and empowered by blockchain technology.
Below are a couple of cases in which blockchain technology will reinvigorate and grow the RegTech market.
Private Equity Deal Data Solution
Most data regarding private equity transactions is stored internally on the firm’s servers, or with a third party data storage provider. The parties involved in any given transaction, such as a buyout, include the portfolio company, the buyers and sellers. More often the case, a transaction will also include investment banks, lawyers, consultants, accountants, and sometimes advisors. Among these groups, sensitive data surrounding the transaction and the company being transacted is passed around. This data is sometimes shared via email and/or virtual data rooms (“VDR”). VDRs aren’t cheap, and are typically reserved for larger firms, while I’ve seen some smaller deals use a dropbox account. A single data room can hold gigabytes of data on a company and their employees. At which point seller advisors take good care to scrub this data of any sensitive materials that could adversely affect employees. Moreover, once the data room is shared there is little the seller can do ensure that data isn’t emailed or stored on a buyers server. The concern is that terabytes of private company data is held by various parties on independent ledgers and is vulnerable to attack.
Imagine a future where the seller owns all deal information via a private blockchain. The investment bank on the transaction would have a centralized location to tack in real time the ownership of documents. Compare the current process a document, like an NDA, is sent from an investment bank to a potential buyer. The potential buyer then forwards the NDA to their general counsel, who then may send it to external counsel. The external counsel will then send it back to the general counsel of the potential buyer and then it works its way back to the investment bank. With a blockchain solution, the investment bank could set up a private chain where all the buying party members could access the documents in real time, changes could be kept and tracked by the investment bank.
General Asset Managers Solution
The solution may be grossly oversimplified, but there is so much potential to improve the backend of financial services. When applying this to compliance, negotiating financing agreements, or drafting closing documents, having everything on a blockchain can allow for more data security and transparency to businesses owners in regards to where their data is being sent.
Moreover, blockchain technology could be used to help fund managers (hedge funds, private equity funds and venture capital) better communicate and transfer funds with their limited partners. An internal private blockchain at a fund could be used to track quantitative based performance reviews and compensation. However, in a world where every fund’s internal matters are operating on a private blockchain, there could rise some new problems. We can only make data harder to compromise, not impossible to hack. For one, competitors will have to get clever quickly to try and estimate competitor pricing but this would be quite difficult to do. Another being, firms could pay hackers to uses sly methods to collect data from their competitor’s private blockchain.
Industry Agnostic Solution
There are a great deal of external expenses that companies in all industries have to manage to effectively improve their Cash Conversion Cycle (CCC). In the current scenario, external vendors, who provide services to a company e.g. an accounting firm, submit expenses as letters in the mail, or email, with all responsibility of digitally storing and auditing these invoices falling on the companies they service. Currently, this work is performed by printing invoices, marking line items for fund/cost center allocation by hand, negotiating by phone or email with vendors, sometimes having invoices updated and re-submitted, and then handing marked-up paper copies to the accounting team, who enter data into spreadsheets in order to allocate expenses to funds/cost centres. All of this manual/administrative effort, with minimal audit trail and knowledge of the progress/location of invoices or immediate reports on the allocation of expenses. With AIFMD, FATCA and SEC requirements, this process quickly becomes costly without efficient technology in place.
A blockchain solutions conveyed through a SaaS interface, reduces complications of sorting and auditing invoices, while maintaining an understanding of cash levels within the company. Detailed, auditable reports are quickly available to regulatory bodies, or the CFO, for inspection and understanding of how cash is moving around the company. Not only does this enhance compliance, but also this upgraded process improves profitability.
The answers listed above are just a few ways companies in asset management and other industries must implement digital technologies, including blockchain, to become truly competitive. To give additional context, researchers at MIT Sloan School of Management estimate “companies throw away 20% of their revenue dealing with data quality issues.” If this isn’t enough to convince companies to upgrade, they will likely fade away as the survival of the fittest nature of capitalism rewards the most efficient companies.