Government and regulatory support game changing
To help the fintech industry thrive, respondents believe the new Federal Government should focus on greater founder and start-up support via incentives (43%), supporting greater capital flow for investment (37%), and greater support for tax incentives and grants for Australian based R&D and commercialisation (36%).
Asked what specific initiatives they believe would best help to grow and support the fintech industry, the most common suggestions were:
- Making the R&D tax incentive more accessible to start-ups
- Having greater non-dilutive incentives like tax incentives, concessional loans or grants
- Reducing payroll taxes for new hires to help combat big tech’s ‘open chequebook’ talent approach
- Lowering tax rates for income attributable to Australian IP/technology/patents
- Offering tax support for fintech’s collaborating with universities and publicly funded research organisations
The R&D tax incentive continues to be a lifeline and, increasingly, a key funding lever to many fintechs, with some founders sharing that over the past year it has been critical in avoiding redundancies and accelerating fintech R&D to maintain a steady state, reduce burn rate or fuel growth.
Similar to the 2021 Census, half (51%) of the fintechs surveyed have either successfully applied for the R&D tax incentive or are in the process of applying. At the time of census close, 43% had a successful application in the past two years, with another seven months left to lodge an FY22 R&D tax incentive application. Also consistent with 2021 results, survey respondents say the R&D tax incentive improves the sustainability or growth of their business (79%), influences organisations’ decisions to undertake R&D in Australia (77%), and encourages onshore operations (72%).
However, 64% are either not confident, or only somewhat confident that they understand the incentive’s eligibility criteria. Given the critical importance of this productivity lever, the Government should continue to improve stakeholder engagement, communications and guidance. This is especially true around software R&D, where 57% of respondents wanted even further clarity despite new Ausindustry software guidance being released in 2022. Fintechs may also find that working with a partner can help to ease the application process and avoid potential pitfalls.
Austrade's Export Market Development Grant (EMDG) continues to have a 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. Although Austrade asserts that fintechs are intended to be EMDG grant recipients, in practice the wording of the regime’s broad exclusions is resulting in fintechs being unintentionally excluded. Due to these exclusions, a widely held view persists that entities related in any way to the financial services industry cannot claim the EMDG.
Given unintended outcomes of the exclusions, we recommend Austrade immediately issues specific guidance for the fintech industry and, eventually, reform the fintech-related exclusion wording to ensure EMDG funding is available to support Australian fintechs to scale globally.
Now is the time to rally
Individual fintechs can increase capital raising success by:
- Investing back into the ecosystem – Successful fintechs are forming their own venture capital funds to work with early-stage, high-potential start-ups. This should become common practice in the sector, with leaders drawing on their own experience to help others succeed.
- Focusing on ESG to increase access to funding – Given investor due diligence will increasingly include ESG questions, we expect to see an uptick in ESG focus across the fintech industry. Currently, only 30% of fintechs surveyed measure their business sustainability or carbon footprint, 19% have a sustainability goal and only 27% have implemented some sustainable business practices. Of those fintechs with no sustainability goal or practice, 30% have no intention of establishing these at this time. But soon they won’t have a choice. With the rising importance of ESG, and strong investor, shareholder and consumer expectations, the sector needs to get serious about developing robust, credible and measurable sustainability strategies.
- Emphasising scalable growth and profitability – Rather than focusing on growth alone, when engaging with the market for capital or M&A, fintechs must ensure their technology and operations are scalable and strategies are aimed at delivering sustainable local and internationa growth.
Opportunities to expand the talent pool
- Addressing diversity, equality and inclusion (DE&I) – The fintech industry continues to struggle with DE&I, drawing its talent from two traditionally male-dominated industries: finance and technology. Although culturally and linguistically diverse (CALD) participation in the Australian fintech workforce is increasing, it remains low with an avarage of 28% of employees identifying as CALD, versus 25% in 2021. 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). However, we expect diverse representation to grow through more inclusive working environments, and targeted talent and migration pathways in Australia. This will help the industry thrive, promoting access to a wider pool of talent.
Diversity should be an imperative at every stage of growth. Better data, measurement and reporting of disparities is one step to improving CALD equality. We are also seeing improved targeted investment to change the status quo in government funding, private capital, particularly venture and angel funding, and education. But more can always be done.
- Considering new pathways – The fintech industry needs a skills pipeline to help transfer, retain and attract talent to and within Australia. Some fintechs are already looking at temporary insourced or contract labour to fill their talent gaps beyond geographic boundaries. Improved skilled migration pathways could also help by connecting refugees and migrants to current and future job opportunities.
Cross-pollination within and beyond the sector
Finally, fintechs must build cross-pollination within and beyond the sector. This is about how fintechs can partner with banks and other incumbents, and with other tech companies, to take core products into non-financial markets. It’s also about how fintechs can partner with each other.
Australia is one of the more mature markets globally adopting fintech products and services by both consumers and businesses, directly or via their banks. Fintech is a key component in financial services evolution because fintech innovation makes it possible to unbundle traditional value chains and create new business models. Partnering opportunities include:
- New to old – New fintech entrants can partner with established fintechs that may already have access to banks to deepen the relationship and relevance to their common customers.
- Cross-border cooperation – Fintechs can accelerate their international expansion plans by partnering with overseas fintechs to provide complimentary products and services, broadening customer acquisition and accelerating time to market.