Fintech success stories – rare like unicorns

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.

Aileen Lee, pic from Wikipedia

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.

For an overview of twelve major recent Australian fintechs click through here to CashWelcome.org.

Looking forward:

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]

Bank 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:

  • The general laws of startups do not apply in fintech. Regulators are intrusive and vigilant. Incumbent players hold onto customers aggressively and consumers are risk averse with their own money.
  • Fintech IP may not be easily defensible. Finserv incumbents hold large portfolios of IP and probably have similar IP to every fintech proposal.
  • Competing on cost is often a losing strategy. Fintech startups typically claim their tech will enable a cheaper price for a financial product. Incumbents have massive scale and can easily win races to the bottom on cost if a fintech begins to gain traction.
  • Consumers often don’t want to pay for new fintech products and services, according to Techtic. Even banks have trouble holding on to fee revenue streams. Consumers accept interest on loans as a cost but little else.
  • Compliance conundrum: Being too compliant and not compliant enough. Compliance with regulations is essential and expensive in financial services but being too compliant is a barrier to disruption and innovation. This conundrum has been identified as a key barrier to fintech startups.
  • Ongoing durability of existing finservs business models. Financial services are often simpler than many fintech entrepreneurs represent to investors.

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 which is 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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