Updated: Mar 6, 2020
Article published in the FINSIA magazine on 21 November 2019.
Author: Alexandra Cain (journalist).
New fintechs are struggling to compete against cashed up incumbents in a crowded market, according to a new survey.
The EY FinTech Australia Census 2019 says fintechs established within the last three years have had greater difficulty raising capital than their more mature peers.
Low consumer understanding about fintechs, investor conservatism and diminishing access to capital are the reasons why funds are drying up.
Apart from this survey, there’s scant up-to-date data on the size of the fintech market. KPMG’s most recent research into the sector states the Australian alternative finance market reached more than US$1 billion in 2017, which reflects growth of 88 per cent compared to the previous year.
Vincent Turner, founder of uno Home Loans, says ongoing capital is a barrier for more established fintechs.
“When I launched in 2016 a flurry of fintech players entered the mortgage space,” he said.
“A few years down the track, we’re seeing the flow of capital go to a smaller number of players who are making outsized returns.
“Many of the others who entered the market at the same time as us are going backwards.”
He says his own business and others including Athena Home Loans and Judo Bank are still able to attract capital.
One of the reasons parts of the fintech sector are treading water is because the market is fragmented and will continue to splinter even further with impending de-regulation in the form of open banking. This regime comes into force next year. It gives consumers power over their data and prompts banks to share this data with other organisations if people give them permission.
“This will create new opportunities for superannuation funds and custodians,” says Grant Callaghan, CEO and founder of data and analytics specialist firm Laneway Analytics.
Callaghan says neobanks and fintech investment payment platforms space are doing well as they as they innovate how we bank, invest and spend. But he says push back against the use of bots to replace the human function is affecting fintechs.
“People want to deal with people and want a relationship with their financial services providers. Neobanks are running customer service workshops to better understand what their customers want before they go live.”
Michael Lukman, Managing Director of specialist advisory firm Gen Advisory, points to the unprecedented number of new Australian Prudential Regulation Authority (APRA) Authorised Deposit-taking Institution (ADI) licence applications as evidence neobanks are gaining traction in the Australian market. Digital bank Xinja is the latest to receive an APRA licence.
Lukman attributes the growth of the local neobank market to “strong investment from overseas and domestic investors, unique product offerings, the APRA restricted ADI licence regime and as a result of the Hayne Royal Commission, which generated consumer interest in alternative bank offerings”.
Regtech is another area of growth thanks to ASIC’s regulatory sandbox and other support - which included regtech symposiums, liaison forums and innovation hubs - as well as the recent establishment of a Senate Committee on Fintech and Regtech.
Payments is another area of fintech growth, according to Luke Deer from the University of Sydney. Underlying infrastructure such as the National Payments Platform (NPP) is supporting this. “Afterpay and Zip Money are growing and they are only going to get bigger,” he says.
Deer concedes there are challenges for fintechs in credit. “Australia is a mature market and that means people already have access to credit. There's not a lot of incentives for people to switch to new providers, particularly if they're able to pay off their repayments every month. Fintechs have problems with scale, cost of funding and competing with the banks But those in unsecured consumer credit are still seeing strong growth,” he says, citing RateSetter and SocietyOne as examples. “They offer advantages for people seeking to refinance consumer debt at cheaper rates.”
Unsecured business lending is another area of growth among newer players, given providers don’t require borrowers to put up their house as collateral.
However, expect a further shakeout of the fintech sector as the more mature winners become more entrenched, with the relatively small size of the local market likely to render the less successful operators uneconomic over time.