A growing equity gap and extremely slow adoption seem to be the main culprits.
Many people involved in Australia’s RegTech industry like to use the phrase that the country “punches above its weight” in this area. But the hollowness of this claim has been exposed by a new report released last week.
After a Royal Commission into the banking industry focused attention on compliance, corporate regulator the Australian Securities and Investment Commission (ASIC) – which also copped some criticism – zeroed in on RegTech as a vital part of the solution.
Install and embrace RegTech was the message, and it will improve compliance, catch bad guys, and reclaim trust. RegTech is the future because the need is now!
In 2018, for example, global financial institutions were charged more than USD 100 billion for compliance failures. It is not only a cost to their business, but one that is passed on to their customers. It also does not quantify the disruptions to business continuity and efficiency.
While RegTech adoption makes sense, and Australia does have a significant number of innovative startups in the RegTech space, what is lacking is implementation and investment.
Common Business Sense
When RegTech started to get some momentum in Australia in 2017, the RegTech Association was formed to lobby for the industry.
The idea was that the Association could help to facilitate the connections between small startups and large companies. It is not just about startup survival. Big companies needed startup innovation if they were to move away from the manual systems that are failing them now.
In a world of more regulations, the only way large organizations were going to get on top of their compliance is through the new platforms driven by artificial intelligence, especially natural language processing, and robotic process automation.
Recent failings in the financial sector have shown the inherent dangers of this. Organizations may be culturally committed to doing the right thing. Still, at the same time, they are dealing with rolling tsunamis of data which the old methods – of manual checking and distribution of information through silos – simply cannot cope with.
Equity Gap Emerges
A recent report from the RegTech Association shows a different side of the problem. Despite the urgent need for RegTech solutions and Australia’s developing concentration of product development, there is a significant equity gap that is holding up mainstream adoption.
Part of the reason for this gap centers around the problems large companies have in procuring from new small companies. Part of it is also because many startups have individual point solutions, while users need end-to-end solutions.
But as the RegTech’s qualitative study of its 120 member firms shows that much of it gets back to investment.
For example, 70% of Australian RegTech firms are kept going by funders, directors, or employees. The majority of them – or 64% -- have been in business for more than three years and have no external funding.
Only 15% have received any VC investment, and only 12% have received corporate VC Investment. Only 9% have received private equity investment.
“The member study shows an ecosystem of bootstrapped, mostly very senior innovators that have designed and fine-tuned technologies that meet the exponential global demand for RegTech,” said the Association’s chief executive Deborah Young.
“Despite clear signs of adoption from corporate and government as customers of RegTech, investors have been slow to realize the promise of this space for achieving returns.”
One takeaway from this data is that perhaps, in the case of RegTech industries, the market is not delivering any efficiencies around supply and demand. It is unfashionable to suggest, but could part of the answer lie in the public sector, with Government funding the rescue?
However, the study found that only 9% of the RegTech firms had received grant funding. So, if public funds were to play any part in building the industry, they are starting from a low base.
The study showed that the Government is the third-highest adopter of RegTech in Australia, awarding 38% of RegTech firms with contracts.
On further investigation, the Government clients do not include the regulatory agencies which might need this technology the most. Only 3% of RegTech firms have won business with regulatory agencies such as ASIC and payments monitoring agency AUSTRAC.
The picture which emerges from the study is of a RegTech industry struggling to engage with investors and the large organizations and agencies which should be its customers.
Fifty-nine percent of RegTech’s surveyed cited lengthy procurement cycles as the greatest adoption challenge from proof-of-concept to full deployment. It currently takes RegTechs 13 months to move from initial conversations with customers to full deployment, and even longer at 14 months in the financial services sector.
The dangers in this slow pace of adoption are a brain drain of expertise to overseas markets. According to Juniper Research, the global RegTech market is expected to rise from USD 25 billion to USD 127 billion by 2024, barely five years away.
Australia might punch above its weight in RegTech now. But if these current trends persist, the country runs the risk of being a featherweight in the not too distant future.