Australia FinTech Report 2021 – Executive Summary

Australia FinTech Report 2021 – Executive Summary

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  AUSTRALIA FINTECH REPORT Australia FinTechReport 2021
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT Introduction With over 550 active FinTech companies, Australia has the most prolific FinTech landscape in APAC, outside China and India. Our research shows that Australia ranks fifth in terms of the total number of new FinTech startups founded since 2015. Though one might think that is a big number considering the small population (a little over 25 million), FinTech adoption in Australia is high. As of 2019, over 58% of the digitally active adult population used FinTech products and services, as per the Global FinTech Adoption Index. Only 13% of the digitally active adult population used FinTech products and services in 2015. COVID-19 has inarguably accelerated FinTech adoption. 2 0 500 1,000 1,500 2,000 2,500 US INDIA UK SINGAPORE AUSTRALIA Number of New FinTech Startups Founded (2015-H1 2020) Here are the three key factors driving FinTech growth in Australia: 1 Demographic Advantage: With a median age of 37, the country has a demographic advantage that reflects clearly in its adoption of digital services. As per Cisco Global Digital Readiness Index, Australia has consistently ranked high among the top 10 countries in digital readiness and adoption across a wide set of parameters. 2 Digital Infrastructure: Sustained investments in foundational digital infrastructure—a major factor powering FinTech— have promoted innovation. This report discusses the New Payments Platform (NPP), Consumer Data Rights (CDR) piloted with Open Banking, and the Trusted Digital Identity Framework (TDIF) in detail. 3 A Progressive Approach to Policies and Regulations: The Australian government and regulatory bodies, especially APRA and ASIC, have worked closely with the industry to create a conducive policy environment for innovation and new business models to take shape. The digital banking charter of APRA, which has led to the growth of the neobanking sector, and the ASIC Innovation Hub supporting innovation across several FinTech sectors are initiatives worth mentioning.
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT The Australian FinTech landscape is dotted by over 750 companies, with 550–600 active FinTechs. This report focuses only on the active ones and covers the top sectors in detail. Lending and WealthTech, each with over 100 companies, are the top two sectors and are followed by Payments & Remittances. Peer-to-Peer companies dominate the Lending segment, and the pandemic has spurred activity in the Buy-Now-Pay-Later (BNPL) space. With over $650 million of venture capital funding since 2018, Lending has been the second-most funded segment in Australia’s FinTech space, next only to neobanking. Neobanking has emerged as one of the most discussed and debated segments in the Australian FinTech landscape over the past three years. Modeled along the lines of challenger banks in the UK, neobanks with ADI licenses attracted lots of attention, both good and bad. With over $970 million in funding since 2018, Neobanking topped the funding charts. SME segment-focused Judo Bank continues to be the best performing neobank in the market. Although the segment started out with much enthusiasm, with early sign-ups in large numbers, the closure of Xinja and the acquisition of 86 400 by National Australia Bank have reignited the revenue model debate in the neobanking segment. Access to capital has historically been a growth barrier to Australian FinTechs. Since 2018, a total of $2.67 billion of VC funding has come into the FinTech sector. Of this, $1.09 billion was collected in 2020 alone. The lack of access to early capital explains the earlier-than-expected IPO of BNPL companies like Afterpay and Zip. Although improved VC funding levels have been slowly reversing the situation, COVID-19 has tightened the funding purses once again, urging several early-stage startups to pivot into revenue-generating business models much earlier than they would have desired. The failure to infuse the much-needed capital, aggravated by the onset of the pandemic, was one of the reasons for Xinja’s exit. The FinTech community expects the government to look deeper into the possibility of state funding, e.g., Victorian Startup Capital Fund, and public-private partnership funding models as seen in the UK and the EU. The 2020–2021 federal budget set aside AUD 2 billion for R&D tax-related incentives exclusively to promote innovation and entrepreneurship. An EY study shows that about 54% of FinTech startups have successfully applied for the benefit. However, there is an increasing demand within the community to make access to this benefit easier. Market Perspective 3
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT Market Maturity Data from multiple sources suggests that roughly 25% of active FinTech companies in Australia are profitable. Roughly 78% of the companies are post- revenue*, of which half of them demonstrated high double-digit growth until the end of 2019. Though the pandemic stifled this growth, a better funding environment, operational discipline, and increased focus on profitability indicate an optimistic future. In addition, the percentage of paying customers in at least 40% of these companies has grown since 2019*. Regulators have frequently stepped in to steer the sector toward long-term sustainability. Following Xinja’s exit from the market in early 2021, APRA stepped in to tighten license requirements, a key ask being the mandatory launch of revenue-generating products early in a challenger bank’s growth trajectory. Higher capital requirements were also introduced as a requirement though the market has been divided on this issue. As mentioned earlier, access to capital has been a pain point for the Australian FinTech sector. Much of the startup industry believes that higher capital requirements will further weaken the sector. However, these policy changes can potentially lead to the following three positive outcomes. • Many companies would be forced to migrate to revenue-generating business models, decreasing the reliance on capital. Growing focus on lending and the emergence of BNPL is a clear indicator. • More startups will prefer partnering with traditional incumbents instead of taking the much harder regulatory licensing route. As Open Banking evolves, collaboration within the entire ecosystem will improve. An increasing number of neobanks are in the works, many of them integrating atop incumbent financial institutions, is an example of this scenario. • The focus on profitability and growth will also force them to explore foreign markets for business. Breaking into new markets can be fast-tracked through government-led initiatives such as the UK-Australia FinTech Bridge program, which will provide companies easier access to the UK market. *EY FinTech Census 2020 4
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  AUSTRALIA FINTECH REPORT 971.8 659.5 482.3 151.9149.7 74.5 50.1 47.0 83.6 15 48 7 35 19 7 10 13 55 Neobanks/Digital Banks Lending Remittances WealthTech B2B FinTech Cybersecurity Payments InsurTech Others Funding Amount ($, Mn) No. of Deals 437.1 765.2 1,090.5 377.6 58 66 57 28 7.5 11.6 19.1 13.5 2018 2019 2020 2021(*Until May) Total Funding ($, Mn) No. of Deals Avg. Funding ($, Mn) Australian FinTech firms raised over $2.67 billion in funding between 2018 and May 2021. The neobanks/digital banks segment leads FinTech funding in the country; it has raised $971.8 million from 15 deals over the past three years. Judo Bank led the funding charts and raised $215 million in its Series D in December 2020; it secured $286 million in Series B in July 2019. Remittance startup Airwallex came in second in the funding race by raising $480.72 million in its Series B, Series C, and Series D funding rounds over the past three years. 5 Segment-Wise Funding Analysis Note: The total number of deals includes deals with undisclosed amounts and excludes debt funding, convertible bonds, grants, ICOs, and IPOs. Funding by Year (2018–May 2021) Note: The total number of deals includes deals with undisclosed amounts. It excludes debt funding, convertible bonds, grants, ICOs, and IPOs. * The ‘Others’ segment includes RegTech, Cryptocurrency, Loyalty/Reward/Coupons, Digital Cards, Crowdfunding, and BankingTech. Funding by Segment (2018–May 2021) Total VC/PE Funding = $2.67 Bn No. of VC/PE Deals = 209
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT Banks/ FIs Techs/ FinTechs VCs/PEs 6 Active Investors (2018–May 2021)
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT Name IPO Year IPO Funding Segment 2015 $5 Mn Lending 2006 $173 Mn Payments 2019 $86 Mn Lending 2019 $40 Mn Lending 2019 NA Lending 2015 NA Banking 2016 $43 Mn Lending 2020 $36 Mn Lending 2019 $4.7 Mn Neobank 2020 $13 Mn WealthTech 2007 $8 Mn RegTech IPO Listing by FinTechs (Since 2015) Name IPO Year IPO Funding Segment 2019 NA WealthTech 2018 $3.9 Mn Loyalty/ Rewards/ Coupons 2016 $14 Mn WealthTech 2015 NA WealthTech 2018 $20 Mn Lending 2018 $645 Mn B2B FinTech 2017 $387 Mn Lending 2012 NA WealthTech 2013 NA Payments 2015 $11.6 Mn B2B FinTech Australia’s FinTech narrative has certainly evolved from disruption to collaboration, leading to high valuations of the operating companies. The past six years were exciting for venture capitalists as they had Australian FinTech investments in their portfolio. With the increasing valuation of Australian FinTechs, a wave of FinTech IPOs has emerged over the past couple of years. 2019 was an interesting year as five FinTechs went public. In 2020, however, the COVID-19 pandemic led to a decline in number. We have analyzed 21 FinTechs that have embarked on their IPO journey over the past six years. Of these, eight belong to the Lending segment and five belong to the WealthTech segment. 7
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT CDR and Open Banking 8 Open Banking The CDR empowers customers to share their financial data with the banks that they choose. Customers can share their data among providers to easily switch providers, compare products, and explore new products and services. The CDR was introduced in the banking sector in July 2020, and it will be implemented across other sectors of the economy, including energy and telecommunications. In Australia, institutions can participate in Open Banking only if they are accredited by the Australian Competition and Consumer Commission (ACCC). Financial institutions and companies that participate in Open Banking must compulsorily adhere to strict security standards when accessing and storing consumer data and are subjected to the Privacy Act. To date, the ACCC has accredited only 12 data recipients under the CDR. Impact on Open banking Currently, the top four banks are mandated to provide account and transaction data; other banks are expected to follow suit by February 2022. APIs enable authorized banks to share consumer details regarding financial products such as savings accounts, term deposits, current accounts, cheque accounts, debit card accounts, transaction accounts, personal basic accounts, GST and tax accounts, credit and charge cards, home loan, personal loan, mortgage offset accounts, business finance, investment loans, lines of credit, overdrafts, asset finance, cash management accounts, farm management accounts, pensioner deeming accounts, retirement savings accounts, trust accounts, foreign currency accounts, and consumer leases. Digital Identity and Mobile Authentication The Australian Tax Office (ATO) and Australia Post are the two government organizations currently offering Identity Service Providers. • The Australian Taxation Office offers myGovID and permits Australian citizens to create a digital ID that can securely verify identity across a range of online services. It functions like a mobile app that can be downloaded from the Apple App Store and Google Play Store. Currently, users can verify two Australian identity documents, such as a driver’s license and a passport, to unlock online government services. • Digital ID by Australia Post is a smartphone-based app that allows users to create and validate their ID against the Australian Government Document Verification Service and then use it as a primary ID system online and in person. Digital iD was the first industry provider accredited under the Trusted Digital Identity Framework. Currently, Digital iD can be used to verify an individual for 100+ partner organizations, enter licensed venues across Australia, and collect parcels at participating Australia Post retail outlets.. Prove is the modern way of proving identity with just a phone number and is used by over 1,000 enterprises and 500 financial institutions worldwide, including 9 of the top 10 US banks. With 1 billion+ consumer and small business identity tokens under continuous management, Prove’s Phone-Centric Identity™ helps companies mitigate fraud while accelerating revenue and reducing OPEX across mobiles, desktops, tablets, contact centers, and in-store channels. Prove serves as mission-critical infrastructure by leveraging Phone-Centric Identity™ to secure the riskiest aspects of digital life: banking, commerce, payments, gaming, insurance, and healthcare. Prove’s solutions enable consumers and small businesses to transact with the trust, speed, ease, and privacy needed to keep the digital economy humming and growing. Prove’s omnichannel solutions are available in 195 countries. Visit prove.com to learn more. About Prove
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT 4,87,221 13,74,527 27,09,280 37,48,737 0 10,00,000 20,00,000 30,00,000 40,00,000 2015-2016 2016-2017 2017-2018 2018-2019 Total number of BNPL accounts Fiscal Year* 1.28 3.14 5.61 0 5 10 2016-2017 2017-2018 2018-2019 Fiscal Year* Total value of BNPL transactions (AUD, Bn) Major Players Most of the market share in Australia’s BNPL market is held by homegrown FinTechs: Afterpay and Zip. Afterpay claims its active customers grew by 80% in the fiscal half ended December 31, 2020, to 13.1 million from 7.3 million in the year prior. Last year, Zip reported 2.1 million customers, a substantial increase from 1.3 million the year prior. Afterpay launched in the United States in 2018, and Zip acquired US-based Quadpay last year to gain a foothold in one of the world’s biggest markets. 9 The Rise of Buy-Now-Pay-Later Buy-Now-Pay-Later (BNPL) has captured the attention of the Australian public, unlike any other payment method. The COVID-19 pandemic has only increased its usage amongst the shopping public. The sector has given rise to Australian FinTechs such as Afterpay and Zip, which have also expanded to international markets like the United States. International BNPL players such as Klarna are also active in the Australian market, with global payment giant PayPal expected to enter soon. Size and Growth of the Market Company reports for various ASX-listed BNPL providers indicate that the value of BNPL transactions grew by around 55% in 2019–2020 and tripled over the previous two financial years. In 2019–2020, these listed entities processed around $10 billion worth of purchases in Australia and New Zealand. The value of BNPL transactions has continued to grow strongly through the COVID-19 pandemic as the shift to electronic payment methods, and online shopping accelerated. Based on recent public disclosures, the value of transactions processed by some of the large BNPL providers grew by over 50% in the second half of 2020 compared to the same period a year earlier. During the same period last year, numbers from the Reserve Bank of Australia revealed that the total number of credit cards on issue fell to 16.96 million in December 2020 from 18.78 million in the year prior. According to data from BigCommerce, Australians used PayPal for 41% of all online transactions in 2021. Meanwhile, credit cards have accounted for 28% of transactions; debit card use is at 19%. BNPL products such as Afterpay and Zip have accounted for 13% of online spending so far in 2021. Data compiled March 3, 2021. *Australia’s fiscal year runs from July 1 to June 30 of the following year. Source: Australian Securities and Investments Commission
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT WealthTech Market Landscape An Analysis of 127 Startups ROBO ADVISORS OTHERS PFM INVESTMENT PLATFORMS FINANCIAL RESEARCH This is not an exhaustive list.
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT Payments Market Landscape An Analysis of 84 Startups BILL PAYMENTS MOBILE DIGITAL WALLET P2P PAYMENTS PAYMENT GATEWAYS/ PROCESSORS POS/ MOBILE POS OTHERS InsurTech Market Landscape An Analysis of 64 Startups CLAIMS POLICY MANAGEMENT/ AGGREGATORS OTHERS ONLINE FIRST INSURANCE This is not an exhaustive list. This is not an exhaustive list
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT B2B FinTech Market Landscape An Analysis of 72 Startups ACCOUNTING TAX ACCOUNTS PAYABLE/ RECEIVABLE COLLECTIONS E-INVOICING EXPENSE MANAGEMENT/ FINANCIAL SUPPORTING PAYROLL OTHERS Lending Market Landscape An Analysis of 143 Startups LOAN AGGREGATORS P2P LENDING OTHERS SME FINANCING ONLINE LOANS This is not an exhaustive list. This is not an exhaustive list.
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  AUSTRALIA FINTECH REPORT AUSTRALIAFINTECH REPORT Contents 03 Introduction 08 Funding Analysis • Segment-Wise Funding • Stage-Wise Funding • Large Funding Deals • Active Investors 13 M&A Activity IPO Listing Bank/FinTech-FinTech Partnerships 40 Conclusion 21 Segment Analysis • WealthTech • Payments • InsurTech • B2B FinTech • Lending 17 Consumer Data Right and TDIF
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  AUSTRALIA FINTECH REPORT About MEDICIis the world’s leading FinTech Research and Innovation Platform. MEDICI is a partner to banks, tech companies and FIs globally with over 13,000 FinTechs on the platform, enabling FinTechs to scale and create global economic impact. MEDICI is committed to supporting the complex financial services ecosystem and enabling stakeholders benefit from the industry’s accelerated growth and global impact. Website: www.goMEDICI.com | Twitter: @gomedici Global Contacts Salil Ravindran Head of Digital Banking & Research [email protected] Aditya Khurjekar CEO & Founder [email protected] Amit Goel Founder & CSO [email protected] Giuseppe Marchese Head of Business Development, Europe [email protected] Authors Sulesh Kumar FinTech Strategy and Research [email protected] Chandraditya Gudla FinTech Strategy and Research [email protected] DISCLAIMER All third party trademarks (including logos and icons) referenced by MEDICI remain the property of their respective owners. Unless specifically identified as such, MEDICI’s use of third party trademarks does not indicate any relationship, sponsorship, or endorsement between MEDICI and the owners of these trademarks. Ravi Rathi Principal, Research [email protected]