28 Aug 2018
There’s no doubt the fintech market is booming, in Australia and around the world.
Recent Accenture analysis of data from CB Insights showed global investment in fintech ventures more than doubled in 2018 to $US55.3 billion. Companies in the Asia Pacific took the lead, particularly in China and several other markets in the region, as investors placed larger bets in more mature startups.
"The best way forward for banks and fintech startups is partnership rather than competition.”
Australian fintechs raked in a record amount of investments last year – raising $A756.7 million, more than double the amount raised in 2017, with various factors stoking the fire. This makes Australia the third biggest market in Asia Pacific behind only China and India.
Competition to collaboration
There’s good reason to be optimistic the trend will continue as open banking and other regulatory initiatives redefine financial services markets. Meanwhile, third-party providers are gaining access to formerly proprietary customer data from banks, insurers and asset managers in Australia, Hong Kong and other places in the region, unleashing an array of opportunities for fintechs.
There’s also been a crucial change over the past 12 to 18 months on how fintechs and traditional financial services companies relate to each other that sets the stage for a positive outlook, with a clear shift in focus from competition to collaboration between the two groups across the globe.
After some initial conflict, there’s now widespread acceptance the best way forward for banks and fintech startups is partnership rather than competition and the creation of big ecosystems will play a bigger role in unlocking value for all stakeholders, especially consumers - as we’ve seen in China and Southeast Asia already, for example.
The record $US14 billion funding round in May of Ant Financial accounted for more than half of deal values last year in China where investments jumped nine-fold to $US25.5 billion and helped drive overall global fintech financing. But the outlook for further collaboration between banks and fintechs, and the resulting value creation, is making investors more comfortable to spread their bets more widely, pushing broad gains elsewhere around the world as well.
There was record fundraising last year not only in Australia but also in Canada and Brazil, as well as Japan, Indonesia and Malaysia, among other markets in the region. Specifically, investments in Japan jumped more than fivefold, to US$542 million.
Looking at activity in Australia more closely, four of the top 10 deals ever took place last year, which is a good indicator the market is maturing and there is general optimism for future growth with so many big bets so recently.
Given the outlook for competition and collaboration, investors’ appetite for risk and potential regulatory changes, fintech investment figures can be quite volatile and in some markets you do see that initial excitement can fizzle quickly after large chunky deals or a spurt of activity in a certain year.
That wasn’t the case in our market last year, when Judo Capital raised $US350 million from a credit line in November to help boost its SME lending business in the largest ever deal in Australia. Other fundraisings included the $US80 million from cross-border payments startup Airwallex, $US71 million that supply chain finance company Octet raised from a credit facility and the $US37 million Study Loans raised in June.
A breakdown of the fundraising volumes by product category clearly shows that investors have been mostly focusing on two sectors in Australia, lending and payments.
Lending accounted for 68 per cent of total funds in the country in 2018, in line with the trend for 2014-2018, while payments startups took 17 per cent of funds in 2018, compared with 19 per cent for the same five-year period. By comparison, lending and payments startups accounted for about one-quarter of global fintech fundraisings each over the same period.
This could be related to recent regulatory changes around the Consumer Data Right (CDR) rules and its implications for banks, insurers and asset managers.
The financial services sector was the first to embrace these new rules with open banking, which allows consumers to grant third parties – such as technology providers, fintechs, telecommunications companies, retailers and other businesses – access to their financial data, enabling consumers to compare products and services more easily.
From 1 July 2019, Data61 and the ACCC will launch an open banking pilot program with the big four banks to test the system. A formal launch is expected to be no later than February 2020.
By this date, the major banks will have to provide and share data on customers’ credit and debit card, deposit and transaction accounts, with mandatory reporting on mortgage data due by February 2020 and on all products by July 2020. Smaller banks will have 12 months more than the major banks to implement the data sharing requirements.
With the availability of credit and borrowing data more easily available and shareable, startups like Judo or Study Loans can more easily analyse and score consumers’ loan applications and offer credit to segments not usually served by banks, including Generation Z or small and medium-sized enterprises (SMEs).
The considerable value that will be generated via ecosystem plays in the coming years in Asia Pacific and the rest of the world means it is far from a zero-sum game, suggesting a strong trend that is moving away from an “us versus them” mentality to an “us with them” mindset creating opportunities for startups and traditional financial firms, with a clear impact in fintech fundraising.
In many ways the potential of this approach has been evident in Asia Pacific and fintech innovators in the region have reaped the windfall.
In China, which leads the world in fintech adoption, the clearest example of ecosystems enabled by digital platforms is Tencent’s WeChat, the “super app” boasting over a billion users. In Southeast Asia, ride-hailing apps Grab and Go-Jek are in a head-to-head battle to become the dominant digital ecosystem, with both embarking on several partnerships and a fintech investment spree.
There hasn’t been an obvious ecosystem player in Australia yet but with open banking and the CDR soon making it easier for companies to share and access consumers’ data, one might emerge here as well.
It’s hard to tell whether we’ll be able to keep up with this pace of torrid growth for fintech investment, but one can certainly see that investors have woken up to the fact financial technology can add a lot of benefits to businesses and consumers alike both in developed and developing markets.
Fintech activity is showing no signs of slowing.
Alex Trott is Banking Lead for Accenture in Australia and New Zealand
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
28 Aug 2018
08 Aug 2018