This is hardly unsurprising, given our closer proximity to Asia than Europe. Australia has a long history of close relations, especially in business, with its Asian neighbours.
Although geopolitical factors are diminishing in an increasingly globalised and digitised world, they cannot be discounted completely yet.
Our geographic proximity to Asia is still a factor to consider as a point of potential competitive advantage, and this is especially the case for fintech founders.
The Asian opportunity
As the initial fintech gold rush plateaus on a global level, all signs point to the next surge of global fintech growth being driven by Asian markets.
Certain market characteristics classify this as logical – greater market demand and more underbanked citizens, increasing income levels, advanced tech capabilities and superior tax structures for innovative businesses.
The stats also support this. According to a KPMG Pulse of Fintech report, global and regional fintech growth figures demonstrated a reduction in global deal volume from $34.1 billion in 2015 to $11.15 billion in 2016.
However, in the third quarter of 2016, Asian VC-backed fintech deals still accounted for exactly half of global fintech funding at $1.2 billion out of $2.4 billion globally, increasing by 50 per cent from the second quarter of 2016.
Corporate participation in Asian VC-backed fintech deals also reached a five-quarter high at 50 per cent of all deals recorded in the third quarter of 2016.
As global fintech activity and confidence levels dropped, Asian fintech activity and confidence levels increased. And there is no reason to believe this was a temporary surge.
The implications
What does this mean for Australian fintechs?
It’s my strong belief that Australian fintechs that do not include Asia in their growth strategies, both in terms of target markets and location of operations, risk falling behind and missing the next wave of fintech.
In Australia, we have several economic characteristics that act to protect us in some ways, but are highly inhibitive in others.
An obvious example of this is our far higher corporate tax rates – 30 per cent, and only set to drop to 25 per cent over a 10-year period. Compare this to Singapore’s 17 per cent or Hong Kong’s 16.5 per cent.
The relatively high tax rate has been long debated by our politicians in the push-and-pull between corporate and individual interest, and obviously presents an unattractive proposition for any fintech wishing to operate in Australia.
The comparatively higher quality of our financial services is obviously a positive, but interestingly acts to drive down the urgency for local innovation.
We do have unbanked and underbanked segments of our population, but they are nowhere approaching the extent of those that can be found in Asian markets.
Our banking system is also (mostly) free of corruption and our financial services generally work. They can, of course, be greatly improved, which is why the fintech revolution began in the first place.
But the level of urgency on our shores is not necessarily as great as it is when crossing the waters to our Asian neighbours.
Taking advantage
The market has already shown signs that it has begun to correct itself.
Throughout 2014 and 2015, we saw early stage, speculative investors place their bets on fintechs with questionable substance or little potential for true scalability or value creation, buoyed by positive global equity markets.
But with a significant drop in global deal volume in 2016, investors appear to now be returning focus to traditional business metrics like ROI, ARPU and gross margins, and the VC market returning to issues of ambition and scale. This has seen those questionable fintechs disappear one by one.
With limited potential for scale in Australia, Australian firms yet to enter Asian markets might consider testing these markets for talent and tech development capabilities first.
In this way, they could leverage their superior corporate tax structures and gain an understanding of how Asian labour markets operate, in a relatively low-risk context.
Instead of viewing the situation as unfortunate, our local limitations may be the incentive needed to push Australian fintechs to ‘dip their toes’ into Asian markets, and trial working at their more favourable tax rates and reaching their larger markets.
With Asia looking set to lead the next global surge of fintech growth, Australian fintechs that don’t take a pre-emptive step towards preparing for this inevitability aren’t risking being swallowed up by our local banks. Rather, they are at risk of being overtaken by our nearby overseas neighbours.
Clayton Howes is the chief executive of MoneyMe Financial Group.
