Digital economies and missed opportunities: What does COVID-19 mean for Australian fintech?
Is COVID-19 driving innovation in fintech? Or are cautious consumers sticking to traditional providers? And is the government holding the sector back?
As the COVID-19 crisis has progressed, we’ve seen startups and sectors react in all kinds of different ways. While some startups have found themselves with a better product-market fit than they ever imagined, others have pivoted to meet new demands, and others are holding on as best they can, waiting for the storm to pass.
But, we’ve also been looking at the broader implications of the pandemic, and the sectors that could be changed for good. We’ve heard a lot about how COVID-19 has accelerated changes that were already on the cards, particularly driving more users towards digital and remote solutions.
So, where does the fintech sector fit in? In Australia, it’s a sector that has been growing and thriving for some years. So on the one hand, we could assume that acceleration of change is applicable.
On the other hand, the economic turmoil of this time means people may be more cautious with their dollars.
“During times like this there are numerous opportunities for fintechs and startups that are the right market fit,” Rebecca Schot-Guppy, chief executive of FinTech Australia tells SmartCompany.
“We’re seeing companies like InDebted and the ‘buy-now-pay-laters’ really succeeding in this kind of marketplace.”
But, as with every other industry, there are businesses that won’t fare so well during this time.
“The real opportunity for fintechs in the post-recovery, as we progress to a digital economy,” Schot-Guppy says.
“There will be opportunities for companies that are struggling, post this.”
Initiatives like the consumer data right (CDR) scheme are still rolling out, and people are being extra conscientious with their money, she notes.
“So wealth management platforms, as well as fintechs that give us insight into how we spend, I can see prospering,” she says.
At the same time, we could see incumbents working to innovate “from outside in”, Schot-Guppy suggests, “looking to speed up their digital transformation by onboarding smaller businesses that can do product offerings quicker and more cheaply”.
And, when the market starts to pick up, she predicts lending lines will come back into play, bringing opportunities for startups in the lending space.
“Businesses are going to want to continue to grow, and to grow they’re going to need access to capital,” she says.
“To ensure that they’ve got the best access to capital, you need both non-bank lenders and lenders to ensure there’s competition in the market.”
What’s going on with neobanks?
While some startups in the fintech space have seen success during the pandemic — just this week, for example, BNPL alternative Limepay secured $6 million in investment, and home loan startup Verteva raised $33 million — the route for neobanks is not so clear cut.
In Europe, some of the biggest names in the space, including Monzo, Revolut and Starling, have reportedly seen their growth rates slow since the beginning of the pandemic period.
While it was first assumed people would turn to digital solutions when they can’t access a bricks-and-mortar bank branch, it could also be that people feeling the economic pinch themselves may be more inclined to stick to the institutions they know.
SmartCompany contacted some of the major players in the Australian neobank space to see if the same was true here.
Xinja founder and chief Eric Wilson says he and his team have been following the trends in Europe, but haven’t seen the same effect.
But, for Xinja at least, there are extenuating factors.
“COVID-19 coincided with the end of our first acquisition push, so we were expecting new accounts to fall off anyway,” Wilson explains.
“They did, but they did so to the level we had projected, not lower, and are holding,” he adds.
“This is above the base level we had before our campaign, so it’s hard to say whether there was an impact or not.”
At the same time, however, as the coronavirus struck, Xinja had to stop onboarding new customers to its Stash savings account, and last week the company announced it was cutting the interest rate of the account from 2.25% to 1.8%, bringing it in line with its nearest competitors.
“We’ve seen a few Stash customers move their money out as we expected,” Wilson says.
“However the numbers of customers doing this have been small … So overall, there have been no major changes.”
On the other side of the coin, Anson Parker, head of product at Bendigo Bank-backed neobank Up, tells SmartCompany the fintech’s experience has “largely mirrored that of the international neobanks”.
April signups dropped by about 30%, compared to the monthly average for the prior three months, Parker says.
However, in the grand scheme of things, he’s not too concerned. Even with the decline in growth, the bank onboarded 30,000 new customers within the past eight weeks.
A large part of Up’s proposition is around understanding how you’re spending, and managing your money, Parker explains. The economic challenges brought by COVID-19 make that more pertinent than ever, he says.
And while he partly attributes the dip in interest to economic factors, he says it’s also down to the changes in behaviour that social distancing requirements have enforced.
“A large percentage of our customers join Up through word-of-mouth – often as a result of conversations between workmates going for a coffee or friends at the pub after work,” he says.
“These kinds of interactions are sadly no longer part of our daily lives, at least for now.”
Judo, a neobank focused on small business recently closed a whopping $230 million funding round, elevating it to unicorn status.
A Judo spokesperson told SmartCompany the bank has seen a sharp uptick in enquiries, “because the big banks are struggling to cope with the level of enquiries from their customers, as well as being reluctant to take on new customers”.
That means, however, it has had to increase its rejection rate, “in order to uphold [its] premium credit rating”.
Judo saw its second biggest month in March this year, the spokesperson said.
Speaking to SmartCompany at the time of the raise, Judo co-founder and chief David Hornery said the bank is focused on offering ‘relationship banking’ to small businesses.
That aspect of the offering becomes all the more important in the current climate, he said.
“In times like this, you get a real impetus to move away from what is fundamentally the industrialised offering of the major banks, to one that is actually very relational in its approach.”
Elsewhere, a spokesperson for neobank Volt said the bank wasn’t in a place to comment, as it hadn’t yet opened to public signups when COVID-19 hit.
At the time of publishing, Cuscal-backed digital bank 86 400 had not responded to a request for comment.
From Schot-Guppy’s point of view, the opportunity for Aussie neobanks will come once the COVID-19 crisis has passed.
That is when consumers will be looking for a greater range of product offerings, easy onboarding processes and better rates.
“That’s when the neobank opportunity in this country is really going to grow,” she suggests.
There’s also a “key distinction” to make between Aussie neobanks and European ones, she says. The European leaders have simply been around for much longer.
“They have a far more progressed digital offering,” she says.
“Ours are still relatively new, so their opportunity is still to come.”
Government support “crucial”
While the worst of the COVID-19 economic crisis is still in full swing, there will be larger fintechs that continue to scale and grow, Schot-Guppy says.
She points to Airwallex, for example, which recently closed a $250 million Series D funding round.
“Our biggest fintechs with traction will continue to do well out of this period, which will obviously enhance our global profile in the sector,” she says.
But, once the crisis passes, there will be a huge opportunity for smaller fintechs to thrive — if they have the right environment in which to do so.
“I think that huge opportunity will only be taken advantage of if the government continues to invest and support the sector,” Schot Guppy says.
When it comes to startup support, “we’re the only nation that has not launched a plan for innovation, or a support package for COVID,” she notes.
“Our regional and global fintech competitors, or benchmarks, have.”
There’s a need for more support from the country’s leadership, and an acknowledgement that the fintech sector could provide a post-COVID boost to the Australian economy.
“Unless we support the sector, across just general innovation and fintech, we’re not going to reach the potential that we have, and the opportunity for a global market presence,” Schot-Guppy says.
“The government has to stand up and do some crucial things to help support the sector.”
Are we likely to see that change? Schot-Guppy is not so sure.
“I was more positive at the start of the COVID-related measures that we would see some support in relation to R&D, and a fintech fund to support companies raising capital, which would be similar to the UK or France,” she says.
“But I’m less and less confident the government sees potential in tech and innovation to help get us out of this downturn economy.”
