The importance of regtech for financial services in Australia

Jun 24, 2021
Dirk Steller

The rise of the fintech sector has invited millions around the world to reimagine the way they conduct their finances. Driven by a lack of trust for traditional banking institutions, we’re currently seeing fintech startups becoming an increasingly attractive choice for a wide range of demographics.

This means a greater requirement for a flexible regulatory framework around banking and financial services. Fintech companies often rely on innovative business models that, while not contravening existing legislation, often fall into gray areas.

Every year, financial institutions report a compliance spend of around AUD$780 billion. Traditional banking and financial institutions are accustomed to navigating obscure regulations and often arduous processes. But, in the fintech sector, compliance needs to be achieved in a dynamic and scalable way. That’s how the regtech sector enters the picture.

Below, we’ll examine the key role that regtech plays in the fintech field in Australia and beyond, discussing its possibilities after the pandemic.

What is Regtech?

The regtech industry aims to bridge the gap between new technology and existing regulation. Its technology allows organisations to comply with complex regulations more affordably and efficiently, while also being able to automate or simplify fintech processes, such as data protection compliance, KYC processes, risk analyses, and many other financial sector needs.

Such is the demand for these kinds of products and services that the global regtech market is expected to reach USD $55.28 billion by 2025, expanding at a CAGR of 52.8% over the forecast period, according to a new report by Grand View Research, Inc.

How does this affect the Australian fintech market? Do regtech companies bloom in Australia’s vibrant startup hub?

Current Regtech Challenges in Australia

The United Kingdom and the United States have led the way in the regtech industry, accounting for almost 30% of all of the world’s regtech companies. Currently, Australia comes 3rd with 80 companies domiciled here, with private funding only reaching a mere 1% of the industry’s total.

Source: KPMG 2020 Australian Regtech Landscape

However, some after-effects of 2020’s lockdowns, such as the acceleration in the adoption of e-commerce, and a drastic reduction in the use of physical money worldwide, haven’t been reflected positively in the Australian Regtech industry. The sector has struggled financially due to a reduction in direct revenue. But why? Let’s take a closer look.

According to a BCG report, 60% of local companies have reported a negative revenue impact since the pandemic began. Two key causes have been travel restrictions and the cancellation of industry events.

Nevertheless, the technological and social disruption caused by Covid-19 will influence the way we work, shop, and trade in the coming years.

These changes bring an opportunity to strengthen the regtech ecosystem and prepare it to solve specific problems in the future, not only in the finance industry but also in education and public services.

According to a Juniper Research report, there’ll be a $127 billion expenditure on Regtech by 2024.

Countries like Israel have developed a highly competitive start-up industry by offering a friendly incubator ecosystem, combining grants, de-regulation, and good conditions to access funding. The Australian Government could drive regtech development here by partnering with companies of the sector, encouraging innovation, and facilitating access to data for developing trials and products.

How Australia Can Learn from the UK

Let’s take a look at the UK, where the regtech market is expected to be worth $12.3 billion by 2023, up from its current market value of $4.3 billion.

As one of the top Fintech hubs in the world, the UK has disrupted the way financial regulation is approached. Since 2015, the UK Final Conduct Authority (FCA) has established “regulatory sandboxes’’. This program invites companies to test their products in a controlled environment, which both facilitates fast, efficient development, and protects live markets from unintended consequences when launching new technologies.

Source: Boston Consulting Group — Australia’s global RegTech hub poised for growth

Through these types of initiatives, the UK government recognises that, for Fintech companies, innovation is the road to regulatory compliance. This is how the UK has reached a Fintech adoption rate of 71%, which is 7% above the average. Australia, unfortunately, has gone against the trend, ranking #23 on the Global Innovation Index, going down from #20 in 2018.

The UK also has a lasting commitment to data ownership. As an EU member, the country had to enforce the GDPR, a groundbreaking, EU-wide regulation that mandates online platforms to implement certain data protection mechanisms. For instance, notifying users about tracking cookies and allowing them to opt-out. After Brexit, the UK amended its Data Protection Act to align with the GDPR.

Through an intelligent, strategic understanding of the sector, and solid legislation around user rights, the UK’s Fintech ecosystem is one where the rules are clear, but they never get in the way of innovation. The marriage of protective legislation with controlled has been a success.

The Future of Regtech in Australia

As the Fintech sector continues to grow, and new aspects of our lives move to digital platforms, there will be an increasing demand for regtech. New data protection, identity validation, and data management needs will appear in both private and public sectors. With the right incentives and support mechanisms, this could be an amazing opportunity for Australian companies.

As security threats evolve, so do customer requirements and regulations. Cloud computing, the Internet of Things, and the integration of new technologies into supply chains pose new challenges that need to be addressed. The recent increase in cyber-attacks, aimed at both private and public institutions, has boosted demand for new answers to cybersecurity questions.

Guided by the UK’s example, it’s worth asking: What could be the role of the government to empower the sector?

The government could contribute to the development of the regtech sector by fostering a more welcoming environment for private funding. Australia’s highly competitive startup ecosystem can serve as a launchpad for local regtech companies. Regtech newcomers could boost their presence by teaming up with Fintech leaders, as well as with financial and regulatory entities.

Just like in the AI sector, Australia has the resources and record to reach a leadership position in regtech. It all depends on how innovators and regulators play their cards.