By Jason Bryce,
Angel investor Aileen Lee coined the term “unicorn” in 2013 to describe a privately held start-up that reaches a billion-dollar valuation.
They are so rare – mythological – they are called unicorns.
This paper reviews the current fintech investment landscape in Australia and compares the outlook for fintech ventures with established financial business models.
There are more than 733 recognised ‘fintechs’ in Australia (second half of 2020), up from 629 in 2019, according to KPMG.
But investment in Australia’s fintech sector is falling as the weight of failure weighs down the venture capital market. The glossy ‘fintech’ brand is fading for investors because the reality is traditional financial business models are more attractive, solid and enduring.
Here we investigate the fintech market in Australia and look at the immediate outlook for investors.
Investment data: The Australian fintech investment marketplace
Total Australian fintech investment was US$1.4 billion in 2020, down from US$1.9 billion in 2019, according to KPMG. Even before COVID-19 hit in early 2020, fintech investment was trending down, both in Australia and globally.
So it’s not a blip, it’s an established trend and not just in Australia, it’s global:
“Investments in Australian companies in the financial technology (FinTech) sector has plummeted by more than 50% in the first half of this year, from US$223 million in the same period last year to $101 million.
"… the drop in Australia mirrors a global trend. Across the globe, total investments pumped into FinTech firms, including venture capital, private equity investment and merger & acquisition deal value, dropped to $37.9 billion in first half of 2019 across 962 transactions.”
Global fintech investment:
Even fintech success stories are often innovative but traditional business models dressed up as disruptors.
Some are simply very traditional new entrants to the market with little or no innovation updated customer-facing marketing and branding based on existing structural models.
Much of the money reported as ‘fintech investment’ is not venture capital but purchases of established finance sector businesses or expansions by large established businesses. A large chunk of the rest of this “fintech investment” is money funding expansion projects.
This chart (below) is based on KPMG data and shows the longer-term trend:
The deals behind the numbers
The 2020 total investment number above includes big investments by Afterpay and Zip into expansion into offshore markets.
But the data is adjusted regularly. This chart below is also from KPMG and shows 2021 predictions:
The 2020 numbers also include the $577 million purchase of B2B payments company eNett by WEX, $209 million raised by business bank Judo and $84 million raised by solar financier Brighte.
Judo and Brighte are lenders with very traditional business models.
Judo Bank provides business loans funded by deposits.
Judo is a new bank but not an innovative new business model. Success by Judo confirms the durability of a very old traditional business model.
Judo bank holds 70% of the funds on deposit by the ‘big three’ neobanks in Australia (in May 2021). But this lion’s share of the neo bank deposit market translates to 0.10 per cent market share of the Australian bank deposit market.
Brighte secured $100 million in capital in December 2020. Brighte is a consumer finance business, specialising in rooftop solar, competing with a similar product from Origin.
While Brighte looks ‘new,’ personal finance for household goods is also a traditional revenue line for lenders.
In 2021, reported fintech investment data will include the acquisition of Afterpay by Square via a share swap.
Afterpay is less fintech innovation (until recently Afterpay transactions were initiated via barcode) and more of a marketing company delivering leads to retailers. 80% of Afterpay revenue comes from retailers.
“It’s a simple idea, enabling customers to pay for purchases later, interest-free, without having to use traditional credit sources, while helping you drive more sales to the seller,” Square’s Jack Dorsey told investors.
Afterpay and other BNPL startups still face regulatory scrutiny and could be reined in. The Reserve Bank of Australia’s Payments Systems Board flagged in August 2021 a closer look at BNPL sector’s mainstay – the ‘no-surcharge’ rule for merchants. A final standard paper from the PSB will be delivered within two months.
In general the gloss of the BNPL sector is being tarnished by the consumer fees that allow it to (currently) avoid the label of ‘credit provider.’
“Some of them (BNPL businesses) exhibit the characteristics of payday lenders... The sector needs to be more accountable,” BankingDay.com editorialised in September 2021.
Buy now pay later company Sezzle says it can idenitify consumers who are a better risk than then their credit score might indicate.
Sezzle reported a provision of US$22.4 million for uncollectable accounts in the six months to June 2021 according to BankingDay.com, equal to a little under half its income for the half-year.
Revolut could be the next neobank and already claims more than 100,000 customers in Australia.
This is a budgeting and money transfer and exchange app that draws on deposits held in other ADIs.
“Local chief executive Matt Baxby confirmed to a senate committee in late August that Revolut was engaged in talks with the prudential regulator on plans to launch a bank in Australia.” reported BankingDay.com.
Currently Revolut says it has 15 million 'banking customers' in total globally with 50 million Euros in deposits, equal to about 3 Euros per person.
Xinja was a neobank for consumers, offering money transfers, deposit and savings accounts, bill payments and debit cards. Xinja operated only on iOS & Android mobile apps, without branches but was fully operational in the retail market for less than two years.
“After a year marked by Covid-19 and an increasingly difficult capital-raising environment, and following a review of the market in Australia, Xinja has decided to withdraw the bank account and Stash (savings) account and cease being a bank. This was an incredibly hard decision”, Xinja said in a statement. 
Why did Xinja close? The AFR reports that it was mostly because it focused on taking deposits (and paying a generous interest rate) long before it made any revenue producing loans.
“If you want to be a bank it is a really good idea to have a product to sell ... having a revenue-generating product,” said John Lonsdale.
The demise of fellow neobank challenger 86 400 after 18 months is being framed as a failure in industry media including StartUpDaily.net. 86 400 is being swallowed up by NAB for $220 million after planning to raise A$250 million over the next three years.
That $220 million is included in the H1 2021 total Australian fintech investment numbers of $1.2 billion reported by KPMG.
86 400 raised $90 million and was in business for 18 months. 86 400 reported losses of $20.3 million in FY2020 and $10.9 million in FY2019.
Douugh / Ziptel
Douugh (ASX: DOU) inherited Ziptel’s ASX listing (ZIP) after a ‘reverse takeover.’ Douugh relisted in September 2020 and has failed to inspire.
Ziptel’s share price plummeted from a high of $1.15 to 1 cent and its main domain name zipt.com is listed for sale for $8,499.
Douugh is a ‘financial wellness’ app that has failed to inspire investors so far. The share price reached 28 cents on 1 November 2020 but has since declined to 9 cents.
What is going on with Raiz?
In September 2021, micro-investing app business Raiz is making headlines for all the wrong reasons. Raiz Invest founder and CEO, George Lucas is seeking to remove the chair and three other non-executive directors (out of four).
While funds under management at Raiz is up 79% to A$799 million in FY 2021, the company has booked another loss for the year. Monthly fees of $3.50 for the Australian customers of its savings account-like investing product are high when compared with competitors.
George Lucas said the dispute concerns “differences in interpretation relating to its regulatory and governance framework.” The dispute continues to escalate with the company secretary leaving on Friday 3 September.
Splitit is an instalment payment provider that has recently axed its chief executive officer and booked growing losses.
In the first six months of 2021, the company made a loss of US$18.8 million, compared with a loss of US$8.9 million in the June half last year. Splitit reported revenue of US$5.5 million in the six months while operating activities cost US$14.1 million.
Splitit is a BNPL variation allowing consumers to use an existing credit card to pay for purchases via instalments, with no fees or interest. During the half it moved to reduce credit risk by ending the funding of debit card transactions and changing its collection process.
iSignthis is currently engaged in a lawsuit with the ASX which suspended trading in in the shares [ASX:ISX] in 2019 at $1.07. This regtech company is a provider of cloud based core banking & networking for business payments.
iSignthis last reported revenue of $17.29 million for the first half of 2021, down 7.58% on the previous six months. iSignthis reported a loss after tax of A$607,841, down from a profit of A$738,271 in the first half of 2020. Legal costs have totalled almost two million dollars for the company in the first half of 2021.
iGrin was one of the first peer to peer lenders to sprout in Australia but didn’t last long.
Igrin was the brainchild of some former banking executives and started with just A$210,000. Being first to market was very important for the company.
"It was our intention to be the first to market in Australia and continue to take a leading role in the development of P2P,” said founder Phil Hopper. The company traded for less than two years.
Nexx.co.nz was among New Zealand’s first movers in the same space and also hasn’t lasted in its original form. Nexx has determined a better business proposition – lending to distressed borrowers.
New Payments Platform not delivering fintech paradise
The decline in new successful startup fintech investment in Australia comes despite the implementation of the New Payments Platform (NPP).
The NPP was supposed to supercharge the fintech startup sector in Australia. Hundreds of business plans leveraged the lower entry barriers provided by the NPP and in particular CUSCAL, a full member of NPP.
CUSCAL has collected fees from fintechs for connecting their transaction overlays to the NPP. But the great deal CUSCAL and the NPP have been providing for fintech startups is coming to an end.
CUSCAL has flagged pricing changes that will effectively raise costs for overlay providers from 2023. The NPP indicated in December 2019 that fees would change as total transaction volumes grow.
“As volumes on the platform grow, the wholesale transaction fee will come down and that same wholesale transaction fee will be charged to all NPP shareholders, regardless of size and the number of transactions that they are putting across the platform,” the NPP said in a senate committee submission.
The general picture in Australia is increasing numbers of hopeful and ambitious startups but decreasing numbers of successful fintech ventures.
A study by Visa and Startup Muster describe a sector that destroys money rapidly.
“While on average the founders expected to hit $10 million in annual revenue in less than five years, 71 per cent are making under $100,000 currently, with 40 per cent not recording any revenue at all.” [AFR, Nov 2019]
Banks stocks tipped as APRA cracks down on fintechs
Bank stocks are tipped to go higher as regulator APRA announced a tougher regime for new fintech entrants in August 2021.
From now on, APRA will have more restrictions and a longer development pipeline for banking license applicants. Now they will usually be restricted to a tiny $2 million deposit limit and must keep $3 million of ongoing capital plus $1 million in a resolution reserve.
Then, new banking license holders will have higher capital requirements than previously. Meanwhile existing banks can continue as before.
“We are going to make a few changes to how we think about licensing,” John Lonsdale, APRA Deputy Chair told the Australian Financial Review Banking Summit in March 2021.
That follows the recent spectacular Australian fintech fail of neobank Xinja which burnt $100 million of investor capital.
Why do fintechs fail?
Financial services is a difficult business to enter. These are among the many reasons for fintech fails identified by Finyear and others:
In this context the comments of Revolut’s Matt Baxby look fairly typical of most fintech propositions now vying for investor attention.
“Our mission is to directly challenge the incumbent banks. They've got wide margins.
“They offer a suboptimal user experience, and their business model's really quite reliant on customer apathy.”
The best fintech investment propositions take an existing idea, business or structure, streamline it, consolidate it and deliver efficiencies.
This article does not suggest that any company mentioned has failed, is in trouble or does not represent a ‘good investment.’ This article does not suggest that any business, company or person has engaged in any activity whichis not appropriate or could come to the attention of regulators.This article is commentary only, not financial advice. Please seek your own advice based on your own personal and financial circumstances.
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