Regtech Association chief Deborah Young has urged government to establish a better targeted ‘patient capital fund’ to support Australia’s burgeoning regulatory technology (regtech) sector, noting that current grant funding arrangements are stifling industry growth and potentially killing regtech start-ups before they get off the ground.

Citing the regtech round of the Federal Government’s Business Research and Innovation Initiative (BRII) initiative, Young said protracted wait times for regtech organisations applying for and receiving grant funding through such schemes can be particularly onerous for start-ups and scale-ups.

She noted that wait times – from application to the awarding of grants – have taken upwards of 12 months.

“You can’t do that to start-ups! A year is a long time in a life of scale-up or a start-up, and if they are putting all their time and resources into doing these things and burning all [that capital] up, and at the end there is nothing to show for it, that’s hard for them,” Young said, speaking to FST Government.

She added: “They might say, ‘Oh, there was a great experience’ [but] now we are better go and get some real customers”.

The BRII, which concluded in early 2022, provided eligible regtech organisations grants of between $50,000 to $100,000 for project feasibility studies, and up to $1 million to develop a proof of concept. Young said the $1 million grant funding was only in the last four weeks reaching the winning regtech organisations.

While noting that the Federal Government has set up a rudimentary patient capital vehicle to support regtech scale-ups, Young argues that it is not particularly well targeted to emerging start-ups. Furthermore, this funding arrangement fails to account for regtechs’ slower pace of development.

The bottom-end of this fund, she said, was “a little too high” for where Australia’s regtech scale-ups tend to be in their growth progression, with “our scale-ups are sitting somewhere between a start-up and where that fund kicks in”.

As a co-investment fund, she added, regtech organisations are also required to “bring half to the table”.

Australia is seen to punch well above its weight in the regtech space, rated as the third-largest regtech hub in the world after the US and the UK. Young ascribes this to the strength of Australia’s overall regulatory compliance regime.

However, regtech funding activity worldwide has declined substantially over the last year, down to just over US$1 billion in the first half of 2023, according to a KPMG. Last calendar year, regtech funding activity peaked at US$20.9 billion.

One of the standout deals in 2023 so far was achieved by an Australian-based banking-as-a-service (BaaS) specialist, Constantinople, whose US$21 million seed round accounted for the largest regtech deal in the APAC region.

Young noted that in a tightening investment market, and with regtechs failing to hit the Government’s proscribed qualifying benchmark for grant funding (including raising the required 50 per cent of capital), the government will end up sitting on “all this dry powder not being able to get it away”.

“[The Government] won’t be sitting on forever on all this money not being able to get it away!”

She argued that a better targeted patient capital fund that “recognises the slightly slower burn of regtech would be welcomed.”

“And I would ask them to continue things like this BRII program, but I would like to see that [funding delivered] in a shorter timeframe – that took a really long time,” Young added.

In 2021, the RegTech Association filed a submission to the Senate Select Committee for FinTech and RegTech in which it expressed the need to address the dearth of capital within the regtech sector by establishing a dedicated patient capital fund, funded from the proceeds of regulatory breach fines.

The regtech peak body also urged the Government to “explore the potential for developing or extending programs where Government and regulators can more easily identify and buy from regtechs around some specific problem statements”.

The Senate Committee was also called on to “put programs in place [to attract] established regtechs to Australia, alongside investment, talent and skills, emphasising Australia’s highly skilled workforce and maturing regtech buyer environment”.

The story was written with additional reporting from Patrick Buncsi.