Why the Australian fintech industry is well-positioned for 2023

Australia’s fintech sector has significantly matured in the past 12 months with the majority (78%) of fintechs now post-revenue, up from 70% in 2021, but founders expect significant headwinds in 2023, the latest EY FinTech Australia Census report has found.

A collaboration between Ernst & Young, Australia (EY), and FinTech Australia, supported by Austrade and Visa, this year’s Census revealed that, while the sector is robust and continues to grow, challenges with raising capital and competing with big tech companies for talent are now front of mind for fintech founders.

Talent remains scarce, with two-thirds (66%) of fintechs indicating rising employee salaries were a challenge. Meanwhile, almost one-third (29%) of fintechs said they had failed to meet their capital raising expectations in 2022.

As a whole however, the sector remains strong. The number of paying customers continued to increase year-on-year among post-revenue fintechs, with 45% reporting more than 500 customers, up from 41% in 2021. Additionally, in a positive sign that the sector is utilising its nimble digital infrastructure to maintain margins in the face of rising costs, the percentage of post-profit fintechs remained steady at elevated levels of 30%.

May Lam, EY Oceania fintech leader and EY Asia-Pacific payments leader said: “In the current environment, fintechs have a vital role to play in unlocking innovation-led value from local and global economies, and in helping to unbundle traditional value chains and create new business models. To weather the market challenges ahead, fintechs can further improve the sector’s resilience by focusing on greater collaboration and partnerships both within and beyond the sector, investing back into the ecosystem, strengthening their ESG capabilities, and opening up the talent pool by considering diverse and alternative hiring strategies.”

Rehan D’Almeida, General Manager, FinTech Australia said: “It’s pleasing to see this year’s Census showing that the local fintech sector and market remain highly attractive and competitive. From an overseas investor and global fintech landscape perspective, Australia’s innovative and sophisticated financial and consumer markets and evolving regulatory environment make it a great place to develop innovative fintech businesses with the potential for global scale. But, with access to capital and talent tightening, collaboration across the entire fintech ecosystem and targeted government support will be needed to keep the sector on its growth trajectory.”

“While we are heartened that the representation of women in fintech remains consistent, with partial increases in representation in leadership and board roles, this Census shows that we still have work ahead of us in promoting even greater diversity within the sector. In addition to our efforts here, we will also be focusing on ESG policy in fintech for the year ahead, creating resources for our members. Not only is there a moral imperative for fintechs to actively and positively contribute to societal and environmental issues, but failing to act could see fintechs miss out on other capital and consumer behaviour trends tied to this movement.”

Malia Forner, EY Oceania start-up and entrepreneurship leader said: “Government and regulatory support remains paramount for the continued growth and development of the fintech sector. Census respondents believe the new Federal Government should focus on greater founder and start-up support via incentives, supporting greater capital flow for investment, and greater support for tax incentives and grants for Australian based R&D and commercialisation. Incentives also provide governments with the opportunity to align growth with other policy goals such as sustainability, digital transformation or social equality. So, it’s both pleasing and critical to see growing commitment to incentivise investment, innovation, entrepreneurship, and R&D, and the economic opportunities and jobs it generates.”

“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.”

Key findings from the 2022 EY FinTech Australia Census

Warning signs in the capital raising environment. The last 12 months saw a steady level of successful fintech capital raised, with 45% of respondents raising more than $10 million (44% in 2021).

But the proportion of fintechs exceeding their capital raising requirements decreased, from 21% in 2021 to 17% this year.

Payments, wallets and supply chain fintechs were most successful, with 21% of this segment raising more than $100 million, compared to the 13% sector average.

Outside of founder funding (54%), capital raising was largely from venture capitalists (33%), angel investors (32%), and strategic corporate investors (29%).

However, interest in and use of alternative funding sources is also increasing, with one in five (20%) fintechs citing government grants, including the R&D tax incentive, as a source of funding this year.

Attracting and retaining talent remains a top priority
Fintechs said the top three challenges or inhibitors to attracting and retaining talent are rising employee salaries (66%), access to skilled domestic workers (58%) and competition from big tech (52%).

Consistent with 2021, the scarcest areas of talent across the industry remain engineering/software (66%), data engineer/data scientist (40%), product management (29%) and sales (29%).

Fintechs largely encourage remote or hybrid working models. While the vast majority (87%) of fintechs have a physical office location, only 8% support purely office-based work.

ESG considerations and diversity identified as areas for improvement
Only 30% of fintechs currently measure their business sustainability or carbon footprint, only 19% have a sustainability goal and only 27% have implemented some sustainable business practices.

Female representation remains stable but low at all levels: 34% in the sector (35% in 2021), 28% in leadership (26% in 2021), 28% of founders (24% in 2021) and 25% of advisory board members (23% in 2021).

Culturally and linguistically diverse (CALD) participation in the fintech workforce is increasing, but remains low at 28% (versus 25% in 2021).

R&D tax incentive still crucial lifeline for the industry
79% of fintechs say the R&D tax incentive improves the sustainability or growth of their business and 72% say it encourages onshore operations.

Similar to the 2021 Census, half (51%) of fintechs surveyed have either successfully applied for the R&D tax incentive or are in the process of applying, with 43% being successful applicants in the past two years at the time of census close.

Yet, 64% of fintechs are either not confident, or only somewhat confident that they understand the incentive’s eligibility criteria, indicating the need for more clarity and engagement.

Meanwhile, the Export Market Development Grant (EMDG) continues to have a very limited reach within the sector. Only 8% of respondents say they have received the grant in the past, and 8% intend to apply for it in FY23.

Confidence falls on international expansion plans
The percentage of respondents who believe Australian fintechs are internationally competitive fell to 69% from 80%, putting the sector’s confidence almost back to 2019 levels.

Confidence that Australian fintechs can win against international fintechs also fell to 57% from 67% in 2021.

Despite this perception though, the percentage of Australian fintechs generating revenue from overseas remains steady (at 40%) and, of those, 43% earn 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. With Singapore in fourth position, Canada has now consolidated its position in the list to be the fifth most popular expansion destination, with fintechs beginning to see greater opportunity there.

Source: Fintech Australia

Attend Fintech22 at Sydney Masonic Centre, Sydney on 30 Nov – 1 Dec 2022 to network, learn and grow with the fintech community


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