Fireside Chats: The future of regtech in Australia

Fireside Chats: The future of regtech in Australia

16 Dec 2021

16 Dec 2021

Following an explosive year for many tech-based companies, Identitii sat down with Deborah Young, CEO of the RegTech Association, to talk about RegTech in Australia, how it’s changing, and where the future of the industry lies.

Regtech in Australia: the opportunity and challenge

Banks globally spend in excess of US$287billion per year on compliance and regulatory obligations, with spending expected to increase to over US$300billion by 2025. This growth is driven in part by constantly changing regulations, as financial institutions battle to maintain compliance with regulatory obligations that help fight financial crime.

In Australia, there are more than 80 established RegTech’s, making up more than 65% of the APAC market. One of the organisations supporting RegTech’s in the country is the RegTech Association, and CEO Deborah Young has been bringing government, regulators, regulated entities, professional services and founder-led RegTech companies together since 2017.

Identitii spoke to Deborah about the unique environmental factors that are encouraging the industry niche to grow.

“We have been in a perfect storm over the past few years and I think there are a couple of key things driving it”, shared Deborah Young, CEO of RegTech Australia.

Young shared key elements to this perfect storm:

Increasing interest in compliance by senior leadership

Having the right people, with decision making power, in the conversations is vital to the adoption of RegTech. Initially, founders experienced a lot of frustration in not having the right conversations with banks and other institutions, perhaps due to a lack of awareness of what RegTech was at the time and to the view of compliance as a necessary cost centre. This has changed in recent years with the growth of the industry and perhaps also the increasing interest CEOs and Boards are taking in compliance. 

Deficiencies in the financial system coming to light

In February 2019, the “Hayne Royal Commission pointed out some great deficiencies in the financial system”, said Young, speaking on the Commissioner’s 1000-page report.

The document was a damning sentence to many institutions, with more than 70 recommendations and 24 referrals delivered in the report.

And though the report was published over two years ago, many of the recommended changes are still being implemented, however there is a focus on internal policies and practices that have again put compliance in the spotlight internally.

The global pandemic and remote working

Working from home forced financial institutions to rapidly adopt (sometimes) new digital practices and overall pushed the operational approach towards a more digital-first method of working. 

As virtual activity and transactions increased over the pandemic, so too did financial crime, and the number of cyber threats and risks.

“Over the last eighteen months [the] pandemic has been a bit of a wind beneath the wings [for RegTech] as people have moved into remote working”, said Young. 

Financial institutions have been forced to look at technology solutions that can be delivered faster than they can build them internally, as internal technology teams have been swamped with navigating the changes required by remote working and delivering new digital products and services to customers.

How banks buy technology is changing, with more and more looking for best of breed technology partners to solve particular niche problems, as opposed to buying large monolithic technology solutions that handle everything. There is also a shift to the cloud, and an increasing desire to buy vs build, as it better enables choice.

Drive to deliver superior customer experience

During our interview, Deborah discussed the “genuine drive by the banks wanting to deliver superior customer service and preserve data privacy…which has created an enormous opportunity for RegTech.” These comments were a key topic at the SIBOS conference held in October and are reflective of the push to deliver new digital products and services we have seen during the pandemic. 

Customers are used to immediate service in their day to day lives and no longer want to wait days for cross-border payments to hit their destination, for example. RegTechs have played a big part in accelerating the adoption of real-time payments as there are some, Identitii included, who are helping ensure real-time compliance, without which real-time payments are impossible. 

Outside of cross-border payments, the focus on exceptional customer experience has also meant improvements in customer onboarding, KYC, digital identity verification and other areas that have traditionally meant a trip to the bank for customers. All of which are key areas of focus for RegTech innovation.

Regulators driving the pace of change

There are a raft of regulatory changes coming across the globe, as regulatory bodies shore up policies and update them to combat financial crime. 

There are reviews of local and global Anti-money Laundering and Counter-Terrorism Financing (AML/CTF) policies and regulators are adapting to other changes including the global adoption of ISO 20022.

The result is a raft of changes that financial institutions must stay on top of, which has resulted in more opportunity for RegTechs who are focused on a particular area of policy and who shoulder the burden of maintaining pace with changes on behalf of their customers. 

Regulators themselves are also adapting technology and processes to keep up with global changes. AUSTRAC announced it’s migration to ISO 20022 in order to reduce the impact SWIFT’s messaging change will have on financial institutions that report incoming and outgoing international transactions under it’s IFTI reporting requirements.

Additionally, the Australian regulator received a further $104 million of funding in 2020, which will go towards upgrading it’s systems and processes to make reporting easier for institutions. 

 “We’ve seen agencies like AUSTRAC take a very proactive approach to RegTech,” says Deborah. “I think one of the challenges was actually this need for the regulators to keep pace with the technology changes. I think from AUSTRAC’s perspective they’ve been doing a great job in actually addressing that issue of pace.”

Regulators connecting globally

While governments around the world are focused domestically because of the pandemic, the fact remains that we are part of a global community and cross-border payments have continued, meaning money laundering has increased all around the world.

But regulators are coming together and combining forces more easily, thanks to technology and organisations like The Global Financial Innovation Network (GFIN) as well as public private associations like the FinTel Alliance in Australia, which is AUSTRAC’s public-private partnership that brings together government intelligence, law enforcement agencies and Australia’s largest financial institutions and businesses to combat serious and organised crime.

“What’s great to see is the regulators coming together, as they have a global platform through GFIN where they’re able to share their ideas and best practice”, shared Deborah. “We need to be in unison”.

Barriers to RegTech adoption

Deborah identified a number of barriers to RegTech adoption, but cited how these are changing due to a number of the drivers outlined above.

Procurement process

“Procurement is the number one barrier but I think we are also starting to see surfacing of the conversations…we had one of the big four banks hold a procurement leadership team (meeting) there, talking about this very issue, says Deborah.”

The RegTech Association was founded, in large part, because of the frustrations regtechs experienced with selling their platforms and products to larger companies. However, many institutions are now adopting different procurement processes that make it easier for start-up and scale up companies to be onboarded. This is primarily because it’s unrealistic for start-ups to afford the often 12-18 month long procurement process, which in turn limits the options available to the banks in terms of innovation and fresh thinking. “We are starting to see some dual track processes coming along. That’s a hard one for the big players and an easier model for smaller companies.”

Investment into RegTech

There’s also still a significant barrier with investment in RegTech as a growth sector, in particular in Australia where capital is perhaps not as readily available as in other markets.

“The top of the tree investment comes from the government. The government creates the requirement for RegTech. They make the policies and they make the laws that the regulators are there to administer, oversee, and monitor. The regulated entities need to adhere to those and RegTechs are trying to reduce the friction in that whole (process).”

“I think we are now starting to see more awareness of RegTech and the capacity of RegTech. We need to start the investment discussion right at the top. Are governments influencing sectors to adopt RegTech? Are governments buying RegTech to reduce their own red tape and drive efficiency and productivity?”

Young also speaks to the barriers with getting venture capital investments, who may be used to a less lumpy revenue cycle and more frequent customer wins. Selling enterprise technology to banks saying:

“Venture Capital has been slower off the mark with RegTech and one of the reasons for that has been a long sales cycle. RegTech isn’t an app you can just pop on your iphone and everything works tomorrow. These are deeply held systems, processes, and procedures within organisations that have legacy systems…(with) people that are used to doing everything on a spreadsheet.”

Despite significant challenges and hurdles, RegTech in Australia continues to expand and grow at a satisfying rate.

How the RegTech Association is supporting Australia innovators

“I think the key difference between how the RegTech Association approaches RegTech and perhaps some other centres is that we are starting to take a much broader view of RegTech in that it can solve for financial services but it can also solve for regulation and compliance in other sectors…Anything you can think of that has regulation attached.

“We’re starting to turn our mind to the government as a sector for using RegTech and we’ll start looking at energy and telco as in Australia they’ll be the next to roll off on consumer data rights.”

“We have recently signed memorandums of understanding with the Canadian RegTech Association and the Nordic RegTech Association in an attempt to join hands globally because this is a global challenge.”

Deborah advocates for a global taxonomy around RegTech and works in tandem with other RegTech associations around the globe to mutually promote the idea. She suggests the associations want to tackle RegTech in a more holistic and global way and having a consistent taxonomy is key for this, which means promoting a global language in how we talk about RegTech and how we categorise RegTech.

“Investors are coming to look at RegTech companies but if there’s no simple categorisation it’s really hard to know at face value what you do.”

“Taxonomy is really important from a whole bunch of angles; people [need to be] able to find what they’re looking for.”