Lack of Access to Capital Hindering Australia’s Potential to Be a Leader in Regtechby Fintech News Singapore July 6, 2020
Limited access to funding and long sales cycles are hampering Australia’s regtech industry, preventing the sector from realizing its full potential, according to industry trade group the Regtech Association (RTA).
The RTA, which conducted qualitative research of 33 regtech companies between October and November 2019, found that the majority of the industry was self-funded (70%). Angels and high net worth individuals were the next most active capital investors (27%), followed by venture capital firms (VCs) (15%), and corporate venture capital firms (CVCs) (12%).
In a report released in December 2019, the organization deplores VCs and CVCs’ minor participation in the Australian regtech sector, noting that access to investment capital was “hyper-critical” to ensure these companies’ continued growth.
Access to funding is even more critical for the industry when considering the long sales cycles regtech companies must deal with. According to the report, it takes on average approximately 14 months for technology deployment to financial services and procurement programs. In some cases, sales cycles can take up to two years.
The sales cycle is linked to the difficulty in raising capital for businesses with a long sales cycle and protracted periods of resource-draining intensity but low cash flow, the report says.
Regtech Australia: Untapped opportunities
Global regtech spending is predicted to exceed US$127 billion by 2024, up from US$25 billion in 2019, according to data from Juniper Research, a growth which will largely be driven by a rise in the automation of resource-intensive tasks including know-your-customer (KYC) checks as well as the use of artificial intelligence (AI) in transaction monitoring.
In this context, Australia, one of the world’s top ten regtech markets that’s both rich and diverse, is well positioned to become a leader in regtech export, the RTA report says. But before the sector can reach its full potential, several challenges must be addressed and in that, the government will have a key role to play.
In particular, the organization advises for the development and deployment of a policy agenda that supports and delivers more efficient regulation and compliance across the industry. It also recommends the launch of new initiatives to address the lack of capital, spur innovation and accelerate regtech adoption.
These initiatives should include a so-called Regtech Digital Marketplace, a digital platform connecting buyers, sellers and regulators; a “Design Box,” which would allow regtechs and regulators to test regtech solution designs; a Regtech Tracker, a system that would monitor the uptake and integration of regtech; and the Regtech Patient Capital Fund, which could be in part funded by regulatory fines paid by financial institutions, the report says.
These initiatives should come in addition to a series of regtech-specific grants, tax incentives for investors into regtech, continuation and expansion of resources to support regulatory education and engagement programs.
The release of the RTA report came at about the same time as the release of a paper by the Australian Securities and Investment Commission (ASIC) in which the regulator highlights the “enormous potential” of regtech, urging the country’s financial sector to embrace regtech solutions. Among the numerous potential benefits of regtech, ASIC cited cost savings, as well as improved efficiency and accuracy.
Although commonly put in a financial services-only context, regtech companies offer a broad range of technology solutions that operate across the economy.
In Australia, the industry is still predominantly active in financial services – though a number of players have expanded to serve other sectors including insurance, government, wealth management, and consultancy, according to the RTA survey.