The global value of venture capital (VC) backed RegTech deals fell from $686.8 million in Q4 2018 to just $337.8 million in the first quarter of 2019, a drop of over 49 percent after four quarters of sequential growth.

However, the number of deals in the sector rose to 25 from 21 in the previous quarter, according to the latest quarterly report from market analysis firm, CBInsights.

The context is regulators clamping down on both FinTech startups and market incumbents, says the report. For example, in the first month of Q2 alone, Standard Chartered bank was fined $1.1 billion for sanctions violations, UniCredit Bank AG was hit with a $1.3 billion fine by the US Justice Department, and Citi, Bank of America, and JPMorgan announced investigations into possible Russian money-laundering through customer accounts.

In March, the US Office of the Comptroller of the Currency (OCC) publicly rebuked Wells Fargo bank for its “inability to execute effective corporate governance and a successful risk-management programme”.

Meanwhile, Revolut is being investigated by the government in Lithuania, the Earnin app is being looked at by US regulators, and online bank N26 has been taken to task by Germany’s Federal Financial Supervisory Authority (BaFin) over failures in its anti-money-laundering (AML) practices.

The challenge facing startups and digital platforms in this space is revealed by N26 swiftly growing to 2.5 million users while struggling to scale its human resources to match the increased demand. The company has been ordered to recheck the identities of numerous customers and improve its Know Your Customer (KYC) processes to ensure that the platform is not being used to launder money or finance terrorist activities.

However, a number of RegTech startups are using AI to fight criminal activities, according to the report. For example, Beam helps FinTechs, banks, brokers, and cryptocurrency companies to lower false positives and centralise data to comply with regulations. In Q1 2019, it received over $9 million in Series A funding.
Meanwhile, Comply Advantage received $30 million in Series B investment for its compliance monitoring solutions, and Tookitaki received $7.5 million in Series A funding for its machine learning-based financial reconciliation platform.

Others, such as Onfido ($50 million Series D funding in April 2019) and Socure ($30 million Series B funding in February 2019) are using biometric authentication and continuous monitoring to fight illicit activities.

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