Aus fintech maintains momentum amid crisis

Operating during a global pandemic is challenging for any business however Australia’s fintech sector appears to have weathered the storm well so far, managing not only to sustain its revenue base but to attract more paying customers than ever before.

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The 2020 EY FinTech Australia Census found the proportion of post-revenue Australian fintechs with more than 500 paying customers has increased by 12 per cent since 2019 to 39 per cent – an impressive result in the current economic climate.

"Being agile organisations, fintechs have been in the enviable position of being able to quickly adapt and respond to the new opportunities these changes present.”

While 2020 has been a challenging year on many fronts, fintech founders are generally still feeling optimistic about the future of the local sector. In fact, many believe the COVID-19 crisis has created new opportunities to reshape and advance the focus on fintech innovation and expansion as part of the post-pandemic economic rebuild.

As people have adjusted to new ways of working and living during the pandemic, there has been a significant increase in consumers’ use of digital payments and transactions. At the same time, the buy-now pay-later sector has expanded at pace, both in Australia and overseas.

Being agile organisations, fintechs have been in the enviable position of being able to quickly adapt and respond to the new opportunities these changes present. This is reflected in a change in the top fintech categories identified in this year’s Census, with payments, wallets and supply chain (30 per cent) now in the top spot, followed by lending (20 per cent) and data and analytics (22 per cent).

Despite current global challenges and travel limitations, Australian fintechs also remain largely optimistic about offshore opportunities, with 88 per cent intending to expand overseas in the future. Australia’s fintech presence in overseas markets is already strong. While traditionally Australian fintechs have sought to enter well-regulated markets with mature financial services sectors, this year has seen them broaden their outlook to include new markets such as Ireland, Germany, Indonesia and the UAE.

Capital, collaboration, challenges

That’s not to say it’s all smooth sailing from here. The fintech sector continues to face the same regulatory concerns and competitive pressures noted in prior years. The COVID-19 crisis has also created new headwinds, such as the tightening of access of capital and concerns that consumers may return to the perceived safety of major incumbent institutions for their financial services needs in uncertain times.

Nearly three-quarters (72 per cent) of fintechs surveyed said the COVID-19 pandemic had a negative impact on their ability to raise capital. More than one in three post-revenue/profit fintechs (39 per cent) reported not meeting expectations their capital raising expectations this year. However, they still fared better than the early stage (pre-revenue/launch) respondents, where 54 per cent reported their expectations were not met. These impacts will be most keenly felt among early stage start-ups, who rely on access to seed capital.

Collaboration with incumbents has also emerged as another key area of concern for fintechs. Before the global pandemic hit, there was a genuine feeling that, at last, collaboration around financial services innovation had reached a tipping point. In 2019, 42 per cent of fintechs reported improved relationships with banks and financial institutions. However, this year, only 17 per cent of fintechs feel the same way.

While it’s understandable large financial institutions have pivoted to focus more on their customers and core services as part of their pandemic response, there is a sense among the fintech community this is slowing the momentum of innovation initiatives and they worry about the implications if this trend continues in the longer-term.

However, Australian fintechs are resilient and they are facing these challenges with the positivity we have come to expect. In the fifth year of the Census, EY can see a snapshot of an industry that is now mature enough to navigate through these uncertain times. A comfortable 78 per cent of the industry is now post revenue and 91 per cent of fintechs surveyed had been in operation for two or more years.

Importantly in the current environment, employment within the sector is also continuing its gradual increase, with the median number of employees now at 10 full-time and two part-time.

Continuing to thrive

If Australia is to be globally competitive, the fintech sector needs appropriate policy, regulation and broader government support to put its ecosystem on the global investment and talent radar. Over the last few years, policy and infrastructure initiatives to foster financial services innovation have gained momentum and supported the industry’s growth.

However, there is still more that can be done in this space and at top of the agenda for fintech founders is making the research and development (R&D) tax incentive more accessible, with 93 per cent of fintechs surveyed saying this would be the most effective potential growth initiative. That’s why it was pleasing to see the increased R&D spend announced in the recent Australian federal budget.

These types of policies are not only important in supporting fintech companies’ growth, particularly in the earlier stages of their development, but also in attracting the type of new innovative businesses Australia will need to help drive the economic recovery.

Fintech founders would also like to see fewer barriers to open banking. Overall, fintechs remain positive overall towards the initiative, with 48 per cent of fintechs surveyed planning to become Consumer Data Rights (CDR) accredited and more than a quarter (28 per cent) saying they will connect through an intermediary when the rules allow. However, many also believe the current pace of CDR implementation is too slow to support fintech innovation and fear the system is being designed to support the major players.

To encourage smaller players into the market, fintech founders recommend streamlining the complex and costly accreditation process, with a tiered system so those with scale can support smaller players.

Lasting implications

The pandemic has proved that, as a community, Australia has the appetite to tackle big challenges. The fintech sector is hopeful this attitude will find its way into the financial services industry, with accelerated disruption and greater uptake of digital technologies helping to create a better financial services ecosystem for all Australian consumers.

Defining the “how” of this change needs to be the next step for policy makers, industry associations, incumbent institutions and fintechs themselves.

Meredith Angwin is Financial Services Partner and fintech advisor at Ernst & Young Australia

The views expressed in this article are the views of the author, not Ernst & Young. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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