Australian fintechs are looking offshore for success, hampered by the funding climate and regulatory complexity account to the latest EY FinTech Australia Census.
The eighth census, a collaboration between Ernst & Young and industry group FinTech Australia, reveals a mature sector that overall is performing well. A record 88% of respondents said they are post-revenue, with 43% turning a profit, up from 30% last year.
But is a less rosy picture for emerging startups, who cited limited local capital, complex regulatory hurdles, and overseas direct investment as the reasons behind focusing their efforts offshore.
EY divined “a two-speed economy” for local fintech funding, with early-stage startups struggling more than mature companies.
It’s also hampered the emergence of new players. Just 3% of the startups in the census are less than 12 months old, compared with 10% in 2022.
As founders across the startup sector know, capital raising is becoming more difficult, and the EY data confirms in the fintech space, with 41% of respondents saying they they didn’t met their capital raising expectations over the past year, up from 29% in 2022.
And they don’t see things changing in a hurry.
Fintechs ranked raising equity capital as their top concern for the year ahead, with 61% citing it as their biggest challenge, well ahead of the uncertain economic climate in second place at 47%. Founders are increasingly emptying their own pockets for capital, with 57% using their own funds to meet companies’ goals, an increase of 7% on the previous two years.
EY Oceania fintech leader Malia Forner said the latest census makes it clear that changes are needed to make Australia a more attractive environment to start and grow a business.
“With successful fintech founders increasingly looking at alternative geographies for capital, growth or their headquarters, the census found that regulation, size of market, financial sector strength, and the cost of compliance were the top factors considered in determining where to grow their business,” she said.
“These are key elements for policy makers to consider and, in an uncertain market, the government can play an important role as a multiplier for the sector – using incentives and grants to expand and attract domestic and foreign investments, offering globally competitive incentives, reducing barriers to entry, and maintaining contemporary, secure and stable regulations, to build on our strong foundations as a regional financial hub.”
Forner points to areas such as embedded finance as essential for the next stage of growth in Australia’s financial and non-financial sectors.
“So, with 57% of surveyed fintechs saying they are still in growth stage, the case is strong for concerted action to support the sector,” she said.
“After a decade of investment in fintech success, we can’t afford to let this important growth sector fall behind other global financial hubs just as it is about to move to the next level.”
Forner also foresees a wave of mergers and acquisitions, consolidation and more partnerships: “as competing or complementary fintech companies, traditional banks and financial institutions look to strategic deals to achieve scale, diversify and remain competitive”.
Intervention needed
FinTech Australia general manager Rehan D’Almeida believes the sector is now at a critical inflection point where it can either thrive or wither and government has a key role to play in whether it’s thumbs up or down.
“The challenging investor landscape and a lack of new entrants seen from this Census highlight an urgent need for renewed government focus and support from visionary investors,” he said.
“It is crucial we keep our best and brightest fintechs focused on Australia to empower our nation’s continued economic vitality.”
Rehan D’Almeida points to fintech as essential to everyone from financial institutions to small businesses, the digital economy and ordinary Australians, amid changing consumer expectations.
“We are seeing a range of innovative use cases, such as new fintech models enabling renters to access the housing market, changing how and when workers access their pay, managing and measuring diversity, equity and inclusion, improving money management and education, helping financial institutions deliver new digital consumer services, and even using banking data to track individual carbon footprints,” he said.
“This is what a mature, innovative and successful fintech sector looks like.”
Here are the TL;DR 2023 EY FinTech Australia Census key findings.
The sector at a glance
• The Australian fintech sector continues to mature, with 88% of fintech respondents to the Census reporting they are post-revenue and 43% of fintech companies now also turning a profit, up from 30% in the previous year.
• The proportion of fintechs valued at over $1 billion has almost doubled to 13% in 2023, compared with just 7% in the 2022 Census.
• Half of Australian fintechs surveyed (50%) are now generating revenue overseas, up from 40% in 2022.
• The most common types of Australian fintech continue to be: payments, wallets and supply chain (33%); lending (26%); data analytics/information management/big data (21%); business tools (19%); and wealth and investment (19%).
• The proportion of fintechs who agree with the statement, the “Australian fintech environment is conducive to growth” fell to 50% this year, down from 59% in the 2022 Census.
• The vast majority (81%) of fintechs support hybrid working, with 45% supporting full remote working.
• The number of fintechs successfully applying for the R&D tax incentive increased from 43% in the 2022 Census data to 52% this year.
Capital constraints, but fintechs are still investing
• Three in four fintechs surveyed (75%) agree that investors are risk averse when it comes to supporting fintech companies.
• The proportion of fintech companies equity funded through an angel investor dropped to 22% this year, compared with 30% in 2022.
• In the next 12 months, fintechs are planning more investment in growth areas that will deliver strategic advantage, such as: artificial intelligence and machine learning (85%); cybersecurity (77%); APIs (74%); cloud systems (61%); and mobile and internet applications (57%).
DEI and ESG focus stalls
• A marginal growth in representation of females in leadership positions (31% in 2023 versus 28% in 2022) and as founders (29% in 2023 versus 28% in 2022) was offset by a decrease in the level of broader female representation within the fintech sector (32% in 2023 versus 34% in 2022).
• Culturally and linguistically diverse (CALD) participation in the sector also dropped this year with the average proportion of employees identifying as CALD falling to 20% (compared to 28% in 2022 Census). The average proportion of leadership positions held by CALD employees also dropped (16% in the 2023 Census compared to 21% in 2022).
• ESG (Environmental and Social Governance) focus within the sector also appears to have stalled in the past year, with just 25% of fintechs measuring their own sustainability or carbon footprint, down from 30% in 2022.
• In line with last year, one in five fintechs (22%) have a sustainability goal but, of those that don’t, the percentage that intend to identify one in the next 12-24 months has decreased – from 46% in 2022 to just 36% this year.
This year’s Census was compiled from an online survey of 126 Australian fintechs, as well as a series of qualitative interviews with fintech leaders and others with innovation functions in major financial services organisations, between August and October 2023.
You can download it here.
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