Two-speed funding tempting Australian fintechs to focus abroad

More fintechs post-revenue than ever before, but challenges emerge for new entrants

Australia’s fintech sector is demonstrating growing maturity and record-breaking success, but limited local capital, complex regulatory hurdles, and overseas direct investment strategies are increasingly tempting local success stories to focus their efforts offshore, according to the findings of the EY FinTech Australia Census 2023 (“Census”).

Now in its eighth consecutive year, the Census, a collaboration between Ernst & Young, Australia (“EY”), and FinTech Australia, paints the picture of a still vibrant local fintech sector, but one needing a refreshed focus in order to continue to drive economic growth and remain a world leader. A massive 88% of fintech respondents reported that they are post-revenue – the highest proportion recorded since the Census’ inception – and 43% are now turning a profit, compared with 30% last year.

However, these positive findings are slightly tempered by the fact that the Census found significantly fewer younger companies in the fintech ecosystem. Just 3% are one year or younger, compared with 10% in 2022, suggesting that start-ups may be facing significantly higher barriers to entry than they were 12 months ago. These entry barriers are reflected in the Census data around capital, which reveals a two-speed economy for fintech funding in Australia, with early-stage start-ups struggling more than mature companies.

In an uncertain macroeconomic environment, capital raising is also becoming more difficult across the sector, with the overall proportion of fintechs that said they had not met their capital raising expectations in the past 12 months surging to 41% in this year’s Census, up from 29% in 2022. In line with this finding, fintechs rank raising equity capital as their top concern for the year ahead, with 61% of Census participants citing it as their biggest challenge, well ahead of the uncertain economic climate which ranked second at 47%. As traditional funding channels dry up, fintechs are increasingly relying on founder funding, with 57% of founders dipping into their own funds to meet companies' goals (up from 50% in 2021 and 2022).

Malia Forner, EY Oceania Fintech Leader said: “The Australian fintech sector has a strong track record of innovation, transformation and growth but, to continue this positive trajectory, it’s clear some immediate changes are required 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. 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.”

“In the coming years, embedded finance and other fintech trends will be increasingly essential components of the digital commercial infrastructure required to drive 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. 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.”

Rehan D’Almeida, General Manager, FinTech Australia said: “We’ve hit a critical inflection point where we are either going to see the ecosystem spring up or spiral 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. It is crucial we keep our best and brightest fintechs focused on Australia to empower our nation’s continued economic vitality.”

“This Census has also underscored the evolution of the sector. Fintech is now essential to financial institutions, small businesses, the digital economy and Australian consumers alike, with these innovative and disruptive companies embracing new business models and technology to improve financial services accessibility and literacy, meet changing consumer expectations, and solve evolving financial services challenges.”

“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. This is what a mature, innovative and successful fintech sector looks like.”

Malia Forner, EY Oceania Fintech Leader said: “All of these Census findings also foreshadow a wave of mergers and acquisitions, consolidation and more partnerships on the horizon, as competing or complementary fintech companies, traditional banks and financial institutions look to strategic deals to achieve scale, diversify and remain competitive.”

Other key findings from the 2023 EY FinTech Australia Census

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 for growth

• 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%).

Diversity, Equity and Inclusion (DEI) and Environmental and Social Governance (ESG) focus stalls in a challenging environment

• 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 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.

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About the EY FinTech Australia Census 2023

This year’s Census is based on an online survey of 126 fintechs across Australia, as well as a series of qualitative interviews with fintech leaders and the leaders of innovation functions within major Australian financial services organisations, conducted between August and October 2023. It is a collaboration between Ernst & Young, Australia (EY), and FinTech Australia.

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About FinTech Australia

FinTech Australia is a not-for-profit peak industry body for the Australian fintech sector, representing over 420 fintech companies and startups across the nation. Our vision is to make Australia the leading market for fintech Innovation and Investment by working with both sides of Government, Industry and the Australian FinTech community to create a supportive environment and partner ecosystem in Australia and abroad.

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