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The Market Explained

Global threat issues like terrorism, transnational organized crime, human trafficking, drug trafficking, arms trafficking, WMD proliferation, corruption and bribery, fraud, and sanctions evasion require both international and national level responses to counter. The common thread amongst these issues often crosses global and national financial systems. Financial flows are the lifeblood for these threat issues. As a result, national strategies incorporate regulation and supervision of the financial services industry to aid in the effort. Through regulation and supervision, firms stand up programs and operations to manage financial crime risk. With that comes a very niche, important, and burgeoning market.

The solutions providers (the “sellers”) come together with financial services firms (the “buyers”) to offer products like data, software, advanced technologies, and professional services. Over the past two decades I have had a front row seat to the development of this market as a former industry executive and current startup founder and chief executive.

While entry into the market has a number of barriers there remains white space for both market cap and new innovation. Barriers are primarily attributed to time and differentiation. Time ties directly to the pace at which the industry tends to move and ultimately how sales cycles work. Differentiation is primarily attributed to messaging, awareness, and the educational hurdles of tuning the market into what is new or what is different. Market cap is still being defined and has traditionally centered around services, presenting a great opportunity for product based solutions.

The conformity from regulated entities (the buyers) remains volatile. This behavior appears to be changing with new priorities like operational efficiency coming directly from boards. Without conformity amongst the buyers the sales cycle and budgeting environment is very hard to discern (especially as it relates to investments into new solutions).

Nonetheless this is a niche and burgeoning market to keep your eye on. Global threats are not only persistent, but evolving. This adds to the continuity of financial crime risk being a hot button issue from an international and national perspective. Moreover, the white space for new innovation is gathering more and more attention.

The financial crime solutions ecosystem is becoming more defined heading into the era of Financial and Regulatory Technology (FinTech and RegTech). However, professional services remain the most stable and growing solutions in the space. Professional services are a mix of advisory and business process outsourcing (BPO). Advisory is akin to consulting and BPO represents both staff augmentation and a fully managed service. There is a long list of professional services firms in the game. The most relevant are EY, Deloitte, PwC, KPMG, Accenture, IBM, Genpact, McKinsey and Company, Oliver Wyman, Crowe, Alvarez and Marsal, Treliant Risk Advisors, Exiger, K2 Intelligence, AML RightSource, ARC Compliance, Dominion Advisory Group, and Steele Compliance. The aforementioned lead with professional services as their core business model, but may have other specific offerings in the form of actual products or “as-a-service” delivery models. The bottom line solution centers around either knowledge or capacity, both areas in which industry still needs help.

On the technical solutions side data and software products are where industry needs the most help. Data products are third party sourced public records, government watch lists, adverse media articles, etc. Software products cover workflow tools, end-to-end business process management (BPM) systems, and risk models or engines. Advanced technologies cover analytics, artificial intelligence (AI), machine learning (ML), and robotics processing automation (RPA). The list of data providers in the space include the likes of Dow Jones, Moody’s Analytics (RDC and Bureau van Dijk), LexisNexis, Refinitiv, and Thomson Reuters. Market leading software providers include BAE Systems, SAS, Oracle, NICE Actimize, Verafin, Abrigo, AI Oasis, Fiserv, FIS, and Jack Henry.

While innovation is certainly happening amongst market leaders, this space has also offered a launchpad for a new startup scene. All of the most interesting startups (early to later stage companies that have been around for a decade or less) are making their way across the technical solutions space. Feedzai, Chainalysis, CipherTrace, ComplyAdvantage, Silent Eight, Hummingbird, Elliptic, riskCanvas (a Genpact company) and Unit 21 are offering more modern BPM systems. Quantifind, Quantexa, Tookitaki, Ayasdi, AML Analytics, Merlon, Kharon, Sayari Labs, Arctic Intelligence and THE DATA INITIATIVE are focused on layered or complimentary solutions (data, analytics, AI, ML, MI) to core BPM systems.

The market is experiencing the following types of transactions: (1) growth stage venture capital investments; (2) middle market private equity acquisitions; (3) larger private equity acquisitions; (4) strategic mergers and acquisitions; and (5) corporate investments into early and later stage startups.

In 2017, Moody’s acquired Bureau van Dijk for approximately $3.3b and earlier this year RDC for nearly $700m. The majority of the startups mentioned earlier have all raised venture funds, with some raising more than $100m. Just recently on the services side, AML RightSource was acquired by Gridiron Capital for nearly $426m.

There are other big numbers associated with this space and ultimately the most fascinating aspect of the space is it’s focus on combatting financial crime.

Thought Leadership Series
An Article by Vic Maculaitis, CAMS
Founder & Chief Executive at THE DATA INITIATIVE

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