The 2021 EY FinTech Australia Census noted a ‘perfect storm’ for financial technology innovation – a trend that could drive more fintech listings on ASX in the next few years.
Fintechs raised record capital during the pandemic and more of them became profitable as the fintech sector rapidly matured, the Census found.
The addressable market for fintechs became larger than ever as Covid boosted consumer interest in transactions online. Consumer-facing financial companies rapidly embraced digital models and payment solutions to meet this need.
Over 400 of these companies are FinTech Australia members. Most of them are privately owned and in the start-up or scale-up phase. “It’s a bit like a flywheel,” says Joyce. “As the fintech industry keeps growing, more emerging fintech companies will reach a size where it makes sense to list on ASX in the next five years.”
The timing is good. The 2021 EY Fintech Australian Census said the sector’s speed to commercialisation and the number of deals and Initial Public Offerings in the past 12 months – including last year’s landmark sale of local fintech star Afterpay to Block (formerly Square) – has given investors greater confidence in returns.
Prominent fintech IPOs on ASX in 2021 included the November listing of Judo Capital Holdings (ASX: JDO), which raised $657 million. Pepper Money (ASX: PPM) raised $500.5 million through a May 2021 listing.
ASX On The Board asked Simone Joyce about current and expected growth in Australia’s fintech sector and what this means for the pipeline of future fintech listings on ASX.
Simone Joyce: The most important growth driver has been policy and regulation. Ongoing work is being done by the Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC), Treasury and AUSTRAC to develop regulation across the fintech sector. The result will be a regulatory framework that is cohesive, technology agnostic and innovation-friendly. Regulation has also changed how fintech incumbents are positioned and created opportunity for new fintechs.
Moreover, the Banking Royal Commission highlighted to consumers that parts of the financial sector can be – and need to be – done better through technology.
Also, the rollout of the 5G network and the new Consumer Data Right legislation, which gives customers greater control of their data, have encouraged the uptake of fintech services. As has the New Payments Platform, which enables near real-time digital payments.
Covid is another factor. More people had to use fintech products and services during the pandemic and have become used to them. Australians are traditionally opened-minded about trying new products and services, and that is true for fintech. Fintech change that was always going to happen, has occurred much faster.
SJ: There’ll be a lot more fintech companies and more of them will be listed on ASX, particularly those needing larger amounts of capital to grow, such as online banks that need capital to lend to customers.
Consumers will increasingly look to fintech as their first choice because the customer experience will be so much better. Customers will expect to be able to do more things online through seamless technology and real-time responses. The days of waiting three days for a payment to go through or to get a response will be long gone.
Fintech will be more personalised, automated and real-time to provide better customer outcomes. In some ways, fintech will become like a financial concierge that helps customers solve problems.
SJ: Cryptocurrencies will have far greater penetration in Australia as an investment class. By 2025, we might be talking about an e-Australian dollar and a digital central bank as growth in digital currencies and their acceptance accelerates.
Digital identification is another huge trend. The ability to identify ourselves online (via a single, interoperable digital identity, such as a fingerprint) will aid with customer verification and the authentication of a range of transactions. As more financial products and services migrate online, a stronger digital identity will enable people to complete more fintech transactions via mobile devices.
Upgrades to the New Payments Platform (which will allow customers to authorise third parties to initiate real-time, account-to-account information) will be another key trend over the next few years. It will become ingrained in consumer psyches that they have more control of their financial data and are not locked into a single bank.
I also don’t think we’ve seen the last of ‘Neobanks’ (challenger banks that operate exclusively online). The Neobank trend will continue to grow over the next few years.
SJ: The 2021 EY FinTech Australia Census saw an uptick in capital raised and that should continue this year. During the pandemic, there was an initial reduction in capital raised by fintechs. Understandably, venture capital firms looked to shore up their previous fintech investments rather than invest in new fintech ventures. More capital went to fintech companies that had previously raised funds.
That trend is starting to unwind as capital pours back into the Australian fintech sector as we emerge from Covid. Institutional investors can see that Covid has quickened fintech growth and are allocating more capital again as a result.
There’s also been an increase in strategic investments in fintech. For example, banks, insurance companies and wealth managers investing in fintech companies. That trend is likely to continue as finance incumbents rapidly increase their exposure to fintech.
International investors are particularly active in Australian fintech. Foreign money continues to pour into the local sector. I believe our fintech sector is on the cusp of a period of stronger growth in foreign capital. Savvy international investors have recognised the potential of Australian fintech in global markets.
SJ: Whilst there will surely be some fintech Initial Public Offerings (IPOs) on ASX in 2022, l don’t expect a large number. That’s largely because of where we are in the capital-raising cycle: most fintechs are still at a stage where they are more suited to private capital.
But if you look out to 2025, many fintechs will have grown to a stage where accessing public capital via ASX makes sense. As more fintechs ‘grow up’ over the next few years, they will need to ‘grow out’ by accessing larger amounts of capital through an exchange listing. We should see many more fintech listings on ASX by 2025.
SJ: I’m not an investment adviser or lawyer, but my general comment would be for fintechs to operate as if they were listing tomorrow. That is, to get their processes in order so that there is not a huge culture shock – or ‘organ rejection’ – when they list on ASX.
Generally, emerging fintechs are advanced with their thinking on compliance, privacy, data and other issues. We’re used to operating in a highly regulated sector with higher compliance costs. We’re used to the scrutiny that comes with providing financial services to consumers and businesses. In fact, we’re among the few sectors that asks for more regulation to drive growth, stability and innovation in our industry.
This focus on compliance and regulation means fintech companies are mostly in good shape when they transition to an exchange listing. That doesn’t mean all listings will go smoothly or that fintechs can’t get things in order before they list. But in my experience, many emerging fintechs are quite developed in how they operate.
SJ: I joined the FinTech Australia board because I wanted to make sure our sector has a deep, proactive, and clear voice in regulatory change affecting the sector. I’ve long thought that for Australia’s fintech sector to reach its potential, we needed a united voice on advocacy and ability to work with regulators. The Chair role is a lot of responsibility and work, but something I enjoy in a sector I am passionate about.
More information about Fintech Australia is available at www.fintechaustralia.org.au