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Article:

Fintech snapshot - Why Fintechs are the answer to an innovation-led economic recovery for Australia

27 August 2020

Tim Aman , Global Leader, Fintech
National Leader, Financial Services
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At a recent Fintech Friday webinar, Tim Aman, Global Leader for Fintech, sat down with Rebecca Schot-Guppy, CEO of FinTech Australia and Will Sinclair, Business Services Partner at BDO to discuss the current state of Fintech in Australia. This article highlights some of the themes they discussed.

Since the impact of COVID-19 hit, there’s been two scenarios playing out in Australia for Fintechs. We’ve heard many successful stories of Fintechs meeting consumer demands as a result of lockdowns – such as such as Buy Now Pay Later business models like Afterpay. However, at the same time, we have seen many more Fintechs struggling to survive.

Prior to the pandemic, Fintech was recognised as the ‘next big thing’ for major economies around the world, with hubs being setup and maturing rapidly, including in the UK, and South East Asia - with Australia beginning to encourage conditions to support it. Governments were working on ways to support their success – such as providing the right environment, like regulatory sandboxes and open banking. However, with the impact of COVID-19, many smaller Fintechs with potential have been left behind and will likely suffer, if not provided with increased and ongoing support.

Did you miss our webinar? Catch up on the themes we discussed by watching our Fintech Friday’s webinar, which provided a snapshot of Fintech.

For those struggling Australian Fintechs – mostly seen in the early-stage - their COVID-19 outcomes have been less about separating the wheat from the chaff – but more so, that those more well-established and capital backed Fintechs were in a better position to cope with a ‘black swan’ event. Even for those Fintechs with the greatest ideas, their options to access capital have been limited, with their primary investors, namely private equity (PE) and venture capital (VC) funding sticking to their core investments as uncertainty persists. While our webinar poll highlighted that Fintechs were optimistic they could access PE funding in the next six months; it was a small sample and as Rebecca Schot-Guppy pointed out, “traditionally PE has not flown into fintech, but is more likely to come from sophisticated or High Net Worth (Individuals and Family groups) and VC funding,” she says.

Overall, it was agreed by the panel that in the coming months, we expect to see there to be more consolidation in the market as the ‘COVID-effect’ still impacts the economy and some Fintechs run out of funding runway.

Yet, there are vast opportunities for Fintechs created by COVID-19 that should not be missed. This is evident in the rise of contactless payments and digital offerings. For incumbents, they will be looking at ways they can create better digital experiences for their solid customer bases – which includes collaborating with the more nimble Fintechs to aid them. Smart Fintechs are looking at other ways they can reach the market, especially in regard to embedded technology – such as payments in the e-commerce sector, as it too continues to boom. There are also opportunities in the market for Fintechs to service the SME community. As Will Sinclair discussed, there’s been many cases of fintechs supporting SMEs with short term cash flow issues as they waited for the JobKeeper stimulus reimbursements. This was due to the fact that they were able to take advantage of having the right technologies and ability to scale up quickly to address SME funding gaps. Rebecca Schot-Guppy also pointed out that there were Fintechs pivoting to help small businesses to go online. Showcasing the broader use cases for Fintech.

It’s these reasons why, the survival of fintechs should be prioritised on the government’s agenda, and should not be overlooked by investors – they offer a means to take Australia into an innovation-led economic recovery, ultimately boosting employment and Australia’s tech future.

During our discussions, Will Sinclair highlighted how the government has done an excellent job in propping up businesses in their economic response to COVID-19, but acknowledged, it’s been a ‘mixed bag’ for Fintechs, especially for lenders. He also noted that, beyond the well-publicised government stimulus measures like JobKeeper, many businesses have also taken advantage of the changes to the insolvency provisions of the Corporations Act and ATO deferments, which have allowed fintechs to ‘kick their tax down the road’. It is yet to be seen whether these measures will assist businesses in recovering from COVID-19, or whether they have simply postponed the inevitable.

Rebecca Schot-Guppy agreed, saying the Government took on feedback to change the alternative tests for the JobKeeper program – which FinTech Australia were critical in the lobbying for. Rebecca says they are also continuing to work behind the scenes with government to help stimulate capital into the market and deregulate the regulatory system. As well as advocating for changes to the current R&D system – not only for accelerated payments due to COVID-19, but also, regular quarterly payments as well as guidelines that make the incentive more accessible to software companies.

However, there are still gaps in the funding.

With government stimulus expected to end in March 2021, many Fintechs are looking at ways they can make it through. In our webinar poll, the majority of Fintechs we surveyed, 85% were looking at regular cash flow forecasts. However 10% or less, were looking at other measures to protect their business once stimulus packages end.

A Regular cash flow forecasting is critical during this time. However, as Will pointed out, cash flow forecasting is a mechanism by which you can make assessments about other things such as:

  • Negotiating new terms with banks and contractors, such as landlord
  • Pre-planning the payment of deferrals for ATO and payroll
  • Pre-planning the payment of employee entitlements
  • Assessing solvency.

READ OUR PUBLICATION: Rethink Fintech

But, beyond balance sheets, what needs to happen?

 “I think that there is a real opportunity for government to get involved in having either a low interest rate loan scheme, or convertible notes. So, taking equity stakes in businesses”, says Rebecca.

The biggest question remains – when will investors begin dipping their feet in the Fintech waters again - given, we have a relatively stable economy, stable government and a good regulatory environment?

It certainly is a ‘watch this space’ situation for a little while longer. With the right government support and private funding, Fintechs have the opportunity to lead us to an innovation-led recovery. Ultimately though, some smaller Fintechs may have to make the decision between dropping out of the market or seeking partnerships and consolidations with other businesses to get us there.
 

Fintech Fridays Webinar Series

BDO is pleased to be launching the Fintech Fridays webinar series. Each session takes a deep dive into the diverse subsectors of the fintech space, including blockchain/crypto, lending, insurance, regtech, personal finance, capital markets, wealth management, payments/billing, mortgage real estate, and money transfer/remittances.

WATCH THE SERIES