The Deep dive: Australia’s FinTech challenges

By Puja Sharma

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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 EY FinTech Australia Census report 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%.

Who is under the radar?

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 : Around 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.

Why does it matter now?

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.

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.”