Challenges remain for Australia’s burgeoning fintech sector

Despite a challenging and uncertain economic environment, Australia’s fintech sector has demonstrated steady growth and increased maturity over the last 12 months. But with increasingly fragile market conditions ahead, key issues such as capital raising and competing for talent are now front of mind for fintech founders.

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A collaboration between Ernst & Young, Australia (EY) and FinTech Australia, supported by Austrade and Visa, the EY FinTech Australia Census 2022 found the Australian fintech sector remains strong and is still in growth mode. The majority of fintechs (78 per cent) are now post-revenue, up from 70 per cent in the 2021 Census.

“Attracting and retaining staff from within Australia continues to be at least somewhat of a challenge according to 85 per cent of respondents.”

The number of paying customers among post-revenue fintechs has also continued to increase year-on-year, with 45 per cent now reporting more than 500 customers, up from 41 per cent in 2021. And in another positive sign of maturity, the percentage of post-profit fintechs has remained steady at elevated levels of 30 per cent, with the sector utilising its nimble digital infrastructure to maintain margins in the face of rising costs.

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The last 12 months saw a steady level of successful fintech capital raised with 45 per cent of Census respondents raising more than $A10 million (in line with 44 per cent in 2021). However, there is evidence of warning signs in the capital raising environment with the proportion of fintechs who exceeded their capital raising requirements decreasing – from 21 per cent in 2021 to 17 per cent this year.

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Outside of founder funding (54 per cent), capital raising this year came largely from venture capitalists (33 per cent), angel investors (32 per cent) and strategic corporate investors (29 per cent). Interest in and use of alternative funding sources is also increasing, with one in five (20 per cent) fintechs citing government grants, including the research & development tax incentive, as a source of funding this year. 

The stage is set for greater opportunities for innovation in alternative funding and incentives beyond venture capital or traditional forms of finance. This will create markets and consumers for new and established financial services enterprises with alternative and non-dilutive financial services solutions.

There is still capital for investment but it is being deployed differently. With cracks appearing in the capital raising landscape, fintechs will need longer cash-flow runways and convincing sustainable growth narratives to secure funding. With the rising importance of ESG (environmental, social and governance) commitments and strong investor and consumer expectations, the sector will also need to get serious about developing robust, credible and measurable sustainability strategies.

Attracting and retaining talent remains a top priority

The EY FinTech Australia Census also found access to talent remains a significant issue for fintechs, particularly in key areas such as engineering/software, data engineer/data scientist, product management and sales.

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Attracting and retaining staff from within Australia continues to be at least somewhat of a challenge according to 85 per cent of respondents. Fintechs said the top three challenges or inhibitors to attracting and retaining talent are rising employee salaries (66 per cent), access to skilled domestic workers (58 per cent) and competition from big tech (52 per cent). 

Challenges with attracting and retaining talent are of course not unique to fintechs. It’s an issue across many industries and geographies globally, with the broader technology sector being particularly impacted. The fintech sector has an opportunity to expand their talent pool by better addressing diversity, equality and inclusion (DE&I) and also considering new pathways, such as a skills pipeline to help transfer, retain and attract talent to and within Australia.

Confidence falls on international expansion plans

The percentage of Census respondents who believe Australian fintechs are internationally competitive fell from 80 per cent in 2021 to 69 per cent this year, putting the sector’s confidence almost back to 2019 levels. Confidence Australian fintechs can win against international fintechs also fell to 57 per cent, from 67 per cent in 2021. 

This local perception contrasts with anecdotal evidence from overseas investors and fintechs though, who view Australia’s fintech sector and market opportunity as highly attractive and competitive.

The Census data also show the percentage of Australian fintechs generating revenue from overseas remains steady (at 40 percent). Of those, 43 per cent are earning almost half of their revenue from overseas sales.

For the fintechs planning overseas expansion in the next three years, the US, UK and New Zealand remain the top three most attractive markets. Singapore is in fourth position and Canada has now consolidated its fifth position in the list with fintechs beginning to see greater opportunity there. 

The road ahead

It’s clear fintech is here to stay and the sector has a vital role to play in unlocking innovation-led value from the economy. But collaboration across the entire fintech ecosystem will be needed to keep the sector on its growth trajectory.

Government and regulators have a role to play as a multiplier, including through opening access to existing grants and targeted incentives for investors and business, designed in consultation with the industry.

Meanwhile, fintechs themselves can also bolster the sector’s resilience to the market challenges ahead by focusing on greater collaboration and partnerships both within and beyond the sector, investing in the ecosystem, opening the talent pool by considering diverse and alternative hiring strategies and strengthening their ESG capabilities.

May Lam is the EY Oceania fintech leader and EY Asia-Pacific payments leader. Malia Forner is the EY Oceania start-up and entrepreneurship leader.

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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