Australian fintech industry well positioned for a challenging 2023, shows significant maturity in 2022

Australia’s fintech sector has matured significantly over the past 12 months, with the majority (78%) of fintechs now by 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, it faces challenges in raising capital and competing with big tech companies for talent front of mind for fintech entrepreneurs.

Talent remains scarce, with two-thirds (66%) of fintechs indicating that increasing employee wages was a challenge. Meanwhile, almost a third (29%) of fintechs said they had failed to meet expectations for the 2022 capital boost.

As a whole, however, the sector remains strong. The number of paying customers continued to increase year-on-year among fintechs by revenue, with 45% reporting more than 500 customers, up from 41% in 2021. Additionally, in a positive sign that the sector is using its agile digital infrastructure to maintain margins in the face of rising costs, the share of post-profit fintechs held 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 an important role to play in unlocking innovation-led value from local and global economies, and in helping to differentiate traditional value chains and create new business models To tackle the market challenges ahead, fintech can further improve the sector’s resilience by focusing on greater collaboration and partnership both within and outside the sector, investing back into the ecosystem, strengthening their ESG capabilities and opening up the talent pool by considering diverse and alternative employment strategies.”

Rehan D’Almeida, Managing Director, FinTech Australia said: “It is pleasing to see this year’s census showing that the local fintech sector and market remains very attractive and competitive. From a foreign 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 companies 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 necessary to keep the sector on its growth path.”

“While we are encouraged 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 to promote even greater diversity within the sector. In addition to our efforts here, we will also focus on ESG policy in fintech for the coming year, and create resources for our members. Not only is it a moral imperative for fintechs to actively and positively contribute to social and environmental issues, but if one does not act, fintechs may miss out on other capital and consumer behavior trends associated with this movement.”

Malia Forner, start-up and entrepreneurship leader at EY Oceania said: “Government and government support remains critical to the continued growth and development of the fintech sector. Respondents believe the new federal government should focus on greater founder and start-up support via incentives, support greater capital flow for investment and greater support for tax incentives and grants for Australian-based R&D and commercialisation. Incentives also give governments the opportunity to align growth with other policy goals such as sustainability, digital transformation or social equality. So it is both gratifying and critical to see increasing commitment to stimulate investment, innovation, entrepreneurship and R&D, and the economic opportunities and jobs it generates.”

– The stage is set for greater opportunities for innovation within alternative financing and incentives beyond venture capital or traditional forms of financing. This will create markets and consumers for new and established financial service companies with alternative and non-dilutive financial services. There is still capital for investment, but it is distributed 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 that exceeded the requirements for raising capital fell, 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 sector average of 13%.

Apart from founder funding (54%), capital raising came 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 funding source 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 wages (66%), access to skilled domestic workers (58%) and competition from big tech (52%).

According to 2021, the scarcest talent areas in the industry are still engineering/software (66%), computer engineering/data scientist (40%), product management (29%) and sales (29%).

Fintechs greatly encourage remote or hybrid work 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 fintech companies currently measure their business’s sustainability or carbon footprint, only 19% have a sustainability goal and only 27% have implemented sustainable business practices.

Female representation remains stable but low at all levels: 34% in the sector (35% in 2021), 28% in management (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% (vs. 25% in 2021).

R&D tax incentives still a 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 land-based business.

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

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

Meanwhile, the Export Market Development Grant (EMDG) still has 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 proportion 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, the percentage of Australian fintechs generating revenue from overseas remains stable (at 40%), and of these, 43% earn almost half of their revenue from overseas sales.

For fintechs planning overseas expansion over the next three years, the US, UK and New Zealand remain the three most attractive markets. With Singapore in fourth place, Canada has now consolidated its position on the list to be the fifth most popular expansion destination, with fintechs starting to see greater opportunities there.