I. Sector landscape and outlook
With rapidly advancing technology and a variety of new players in the market, the fintech industry has been evolving and revolutionising the world. Fintech refers to any technology that helps financial institutions, businesses, and consumers in providing financial services in newer and smarter ways than conventionally offered.

With the onset of COVID-19, people have been pushed to stay at home while organisations have been forced to adopt work from home model to ensure the smooth operation of the business. Technology has proved to be of great assistance during such challenging times with an increasing shift to digital payment methods giving a boost to the fintech sector.

Sun is setting on Traditional Methods 
Reserve Bank of Australia’s Consumer Payments Survey 2019 has revealed that cash transactions have been falling on account of increasing electronic payment. Although the share of in-person payments made in cash was high at 32% by number and 19% by value in 2019, payments were down from 43% and 30% in 2016, respectively and the trend is clearly on the downside. This evidently reflects consumers increasingly using contactless ‘tap-and-go’ options for their purchases. The survey also revealed that only 4% of the younger participants are likely to be cash users as against 40% of those aged 65 and above. Clearly, this depicts that the younger lot is more open to technology than the older ones.  

Figure 1): Cash Payments Share of in-person payments

Source: Reserve Bank of Australia

Over the years fintech has made inroads into many traditional services apart from carving out new age services. Let us have a look at some of the emerging fintech space in Australia.

1. Insurance

Australia has well-developed, highly competitive and well-regulated insurance sector. The insurance industry has been slow in adopting new technologies and global change.

Figure 2) Insurance Market

Source: Kalkine Secondary Research

The insurance market is segmented into three sectors, namely life insurers, health insurers and general insurers. Changes in consumer behaviours, the advancement of technology and the surge in the fintech industry are disrupting the insurance industry by redefining customer experiences through innovation.

New technology-driven insurtechs are leveraging on technological advancements in AI, data analytics, mobile apps and disrupting the insurance industry. They are more agile than the incumbents allowing them to offer and generate more value to their clients and investors.

There are increasing predictions that autonomous vehicles are in the making and will be available in the coming few years. As per a Deloitte report, the autonomous cars will fundamentally change the present risk models in $6 billion motor insurance market in Australia, forcing organisations to rethink the role of insurance. 

2. Wealth management

Australia has one of the biggest and fastest developing funds management sectors globally led mainly by Australian government-mandated retirement schemes. The sector persists in creating new opportunities for fund managers, service providers and related entities.

The sophistication of investor base further overhauls this sector reflecting the constant demand for cutting edge products and maturity of the sector. The rapid growth of superannuation funds shows consumer’s appetite for control and interest in automated services.

Hence, wealth managers are refurbishing their value proposition to remain in business and are facing competition from influential consumers who sell and share their investment expertise. More customers are shifting to self-management, and more entrants are expected to use low infrastructure due to increasingly automated processes, waning advantages given by scale.

Following the advent of technology, a lot of wealthtech firms are offering services such as robo-advisory, robo-retirement, digital brokerage, etc., which are cost-effective and user friendly.      

3. Blockchain technology

Innovations emerging from the upgrading of technology have boosted investments in the fintech sector, and blockchain is one significant contributor.

Blockchain technology is a digital ledger of economic transactions which cannot be changed and is a programme to record any activity with which a value is associated. Blockchain technology in the fintech space has been designed to make banking more seamless and efficient for both banks and customers by cutting costs and fixing the uncontrolled bureaucracy in conventional banking.

Figure 3) Share of Australian Block Chain Activities, by Industry

Source: Source: Department of Industry, Science, Energy and Resources; CSIRO’s Data 61

As per Gartner, blockchain is anticipated to produce an annual business value of over USD 3 trillion by 2030, and about 10%-20% of the global economic base would be operating on the technology by then.

Australian Government released its national blockchain roadmap on 7 February to explore potential benefits of blockchain and has set goals for 2020-2025 to establish new economic growth and enhance productivity.

4. Online Lending

Online lending is another space where technology is revolutionizing the scenario. In general, low ticket borrower such as the small business struggle to get loans because of unproved creditworthiness and lengthy disbursement process. Following the global financial crisis, most of the traditional lenders have tightened their lending process when it comes to serving low ticket borrowers who generally do not have a credit history. This paves the way for the online lenders seeking to extend financing to businesses that had no other options. The entrance of fintech players in this space has changed the traditional way of lending. Technology helped in speeding up the loan disbursement process. Online lenders are disbursing loans in a single business day as compared to the traditional process, which takes weeks or months.

Let us now understand the risks that might plague this sector.

Key risks to the sector
Though Australian fintech companies have been surging up in coronavirus period after bottoming out in March, the sector faces a huge risk of bad debts and funding. Negligible advice and failure in servicing clients are one of the risks that fintech companies face due to its new financial products and new business models. They also need to implement suitable risk management systems and keep pace with the regulator diktats.

Further, fintech companies can be the prime focus of cybercriminals. Data breaches, network security as well as high volumes of transactions handling can leave the sector particularly vulnerable to thefts.

Figure 4) Fintech Sector Risks

Source: Kalkine Secondary Research

Regulatory requirements for the fintech industry in Australia
The Australian Securities and Investments Commission (ASIC) is an entity to regulate company and financial services laws to safeguard consumers, investors and creditors while Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation. Regulations around the fintech industry are quite flexible in Australia.

Entities that carry out financial services business or engage in consumer credit in Australia are required to get a licence. They also need to hold an anti-money laundering and counter-terrorism license (AML/CTF) if the firm is involved in buy and sell transactions regularly. Obligations involve enrolling with AUSTRAC, reporting and customer due diligence. However, there is no regulation to regulate cryptocurrencies in Australia, and only formal monitoring of cryptocurrency activity is in relation to AML/CTF.

RBA, the regulator of payment systems, is at present in the process of reviewing and lowering the costs of electronic payments for merchants and consumers amid rising e-banking popularity during COVID-19.

New Initiatives to Drive Fintech Space Growth
Two initiatives were launched in Australia in the last week of May to drive growth in the fintech industry. The regulatory sandbox governed by the new federal laws has been widened. The new regulations will incorporate fintechs involved in insurance services and will be in effect from 1 September.

Fintechs and insurtechs will be allowed to experiment with their products and services for 24 months without getting a licence from ASIC. Further, X15 Ventures, an investment vehicle funded by Commonwealth bank, has declared hosting of a virtual gathering in July that will give fintechs a chance to showcase their solutions to a range of prospective investors.

Figure 5) Fintech Initiatives

Source: Kalkine Secondary Research, Baker McKenzie, Commonwealth Bank

Australia is also eyeing a new pact with Singapore to improve exports of the fintech services industry and enable easier data swaps across the border to enlarge the digital landscape. Australia-Singapore digital economy discussions were completed in March to lower trade obstacles and strengthen associations between businesses and authorities in the two countries.  

As per the industry experts, global fintech market is expected to touch $500 billion by 2030. High investments in technology-based solutions, infrastructure-based technology and APIs are reshaping the fintech industry.

Globally investments in new fintech start-ups have dried up, and there has been a shift in investor preference towards established fintechs viz-a-viz early start-ups. This shift in trend should bode well for listed fintech entities.

COVID-19 has left many businesses in the doldrums; let us understand how this pandemic has affected the fintech sector. 

Has Fintech Benefited from COVID-19?
 
The fintech sector has benefited immensely from the social distancing rules applied due to COVID-19 outbreak, and there has been remarkable growth in the usage of digital financial services and e-commerce.

However, many fintechs are under stress due to problems in funding, interest rate cuts and the economic downturn. Before the COVID-19 crisis, only few fintech firms were breaking even or profitable, which can pose a problem for the sector. Amid COVID-19 crisis, businesses can witness a decline in their valuations due to lack of funding, the imposition of travel restrictions and overall fall in spending. 

Many insurtech and proptech companies are now reinforcing their capital and funding, while others are following cost saving measures and operational flexibility for these tough times. Payment and wealthtechs are overhauling their infrastructure by expanding capacity to withstand stress from high transaction volumes.

Though the COVID-19 uncertainty has posed few challenges to the fintech companies, many are coping up with the crisis by innovating, adapting, and adjusting their services as per customer needs. 

Hence, as the broader economy recovers and restrictions ease, there might be new prospects for fintech firms which may come out stronger once the crisis gets over.
 
II. Investment Theme and Stocks under Discussion (IRE, BVS, MNY, PGL and PPS)
After understanding the recent trends in the industry, let’s now look at five players from the industry as listed on the Australian Stock Exchange. To assess the same, companies’ stocks are evaluated based on ‘Price/Sales’ methodology.