Unique Strengths of Australia’s Formal Financial System & Corresponding Opportunities for the FinTech Community

As reported by The Australian, although FinTech investments globally declined in 2016 to $24.7 billion from a $46.7 billion in 2015, Australian FinTech investments soared to a record high of $626 million in 2016, up from $185 million in 2015. By 2020, the Australian FinTech revenue is projected to grow at a CAGR of 76.3% and exceed $2.92 billion, driven by reduced taxes on investments in startups, a steady increase in mobile payments and the rise of tech-savvy digital natives.

Not only has Australia been footing FinTech funding in an accelerated pace, the market is also ahead of Europe and North America in driving digital revolution in the financial services industry overall. The latest study on the state of digital sales in banking commissioned by Avoka (the company that built Avoka Transact, a cloud-based digital business platform used to accelerate customer acquisition and increase business agility in financial services, government, education, field service and other industries) found that mobile readiness continues to be highest in Australia, with the leading banks having mobile capabilities for 75% of their personal banking product account openings.

Moreover, the study found that Australian banks are ahead of Europe and North America at the breakdown to personal, and wealth management solutions: 34% of personal products are capable of being opened or applied in Australian banks via a mobile device in 2017 (vs. 43% in Europe, and 39% in North America the same year). The same position goes for wealth management – 38% in 2017 (vs. 24% in Europe, and just 7% in North America).

In a conversation with the LTP Team, last year, Tom Rundle, former Global Head of Payments at OFX (currently Senior Director, Business Segment at Flywire), has emphasized some of the hallmarks of Australia’s financial services industry:

  • The dominance of only four banks + two supermarket chains, which makes it hard for startups to penetrate and get scale domestically (which explains the estimation that 39% of startups in EY survey in Australia indicated incumbents as their biggest competitors), while accepted banking and payments processes can quickly get ubiquitous coverage;
  • The appetite amongst the general population to try new financial technology – Australia was the fastest nation to take up contactless card payments on a large scale along with heavy usage of smartphones;
  • Australia has made the most progress amongst developed nations with regard to reducing the usage of checks – the country has become known in many multinational businesses as a good market to test out and refine new technology ideas;
  • Superannuation (Australia’s national retirement fund scheme) has been massively successful and now, Australia’s domestic investment scene is dominated (in terms of AUM) by superannuation funds. These funds can tend to drive strategies towards reliable long-term returns versus markets where there is more appetite to seek massive growth outperformance; so while there are substantial amounts of funds available for domestic investment, relatively little is directed (yet) towards the high-risk, fast-growth phases of early-mid startups.

The strengths of the formal financial system, however, has not been limiting the opportunities of the FinTech community in Australia, but rather creating unique trends and strategies tuned towards leveraging mutual capabilities for organic growth and development. The Australian government is very supportive of national FinTech, and such non-profit organizations as FinTech Australia set critical FinTech priorities and take steps to facilitate venture investments in the national FinTech industry.

The government ensures that FinTech startups can be eligible investments for the purposes of the venture capital tax concession. It allows access to the incentives for venture capital investment, including those available under the NISA, encouraging investment in FinTech. Early Stage Venture Capital Limited Partnerships (ESVCLPs) are investment vehicles that provide tax exemptions for those investing in innovative companies at the early and growth stages of a startup.

Australia has a huge advantage in its sophisticated regulatory institutions. There is a huge FinTech opportunity if regulators use their capabilities and trust to open up banking and to enable innovation. Smart regulation would deliver digital identity, open data and open API standards and mandates, emphasized Jost Stollmann, Executive Director at Tyro Payments.

Some of the interesting descriptive indicators of the FinTech landscape in Australia have been recently outlined in the report by EY, demonstrating unique constraints and opportunities in Australia’s FinTech scene.

Source: EY FinTech Australia Census 2016

While the constraints and shortcomings of Australia’s FinTech can be somewhat overwhelming, they represent an opportunity for improvement and, in the future, will draw international talent toward the ecosystem that is expected to become internationally competitive by over 60% of companies surveyed for the report. After all, businesses expect to witness an average of 201% of revenue growth in the next year.

Competition policy and microeconomic reform will be driven by the innovations in FinTech, especially in payments systems, and the ASX has already announced that it is seeking to introduce blockchain technology for its clearing and settlements process.

FinTech is going to revolutionize how consumers and businesses, as the drivers of economic activity, interact. This is going to have big implications for demand in the future. We need to be part of these changes and we have got to work out the best way to engage with FinTech and prepare for the financial system and economy of the future, shared the Hon Scott Morrison MP, Treasurer of the Commonwealth of Australia.