Chapter 6

Access to Capital

This chapter canvasses issues related to access to capital and investment funding. Evidence to the committee highlighted the importance of this issue in creating favourable conditions that facilitate the growth of FinTech and RegTech innovation in Australia.
This chapter highlights several issues relating to access to capital for FinTechs and RegTechs, including:
measures implemented by the Australian Government to support access to capital for lenders and businesses in response to the COVID-19 pandemic;
the operation of the Early Stage Venture Capital Limited Partnerships (ESVCLP) program and the Early Stage Innovation Company (ESIC) tax incentives;
the role of collective investment vehicles;
the need for collaboration between large and small businesses;
issues relating to the ability of superannuation funds to invest in the startup sector; and
national interest issues concerning access to investment capital.

Support measures relating to COVID-19

The Australian Government announced several rounds of measures from March 2020 onwards designed to ameliorate the economic impact of the COVID-19 pandemic. Several support measures were put in place that supported access to capital; some applicable to FinTech and non-bank lenders, and some addressing general business needs to access loans and other forms of capital during the crisis.

Support for SME lenders

On 19 March 2020, the government announced a facility of up to $15 billion to support lenders providing credit to small and medium enterprises (SMEs).
The Treasurer, the Hon Josh Frydenberg MP, stated that this measure ‘will enable customers of smaller lenders to continue to access affordable credit as the world deals with the significant challenges presented by the spread of coronavirus’. The Treasurer stated further that small lenders ‘are critical to Australia’s lending markets, often driving innovation and providing competition for larger lenders’.1
Legislation creating the new investment facility, called the Structured Finance Support Fund (SFSF), passed the Parliament on 23 March 2020. The SFSF is administered by the Australian Office of Financial Management (AOFM), to invest in wholesale funding markets used by small ADIs and nonADI lenders. In announcing the facility, the Treasurer stated that the $15 billion capacity will ‘allow the AOFM to support a substantial volume of expected issuance by these lenders over a 12 month period’.2
The SFSF lending facility is designed to complement the Reserve Bank of Australia’s (RBA’s) announcement of a $90 billion term funding facility (TFF) for authorised deposit-taking institutions (ADIs) that will also support lending to small and medium enterprises.3
The government’s announcement was welcomed by the sector, with FinTech Australia Chief Executive Officer (CEO) Ms Rebecca Schot-Guppy labelling it ‘landmark recognition of the power of fintech from government’.4
The AOFM outlined the purpose of the SFSF in a submission to the committee:
The SFSF aims to ensure continued access to funding markets by SME lenders impacted by the economic effects of the pandemic and in doing so maintain competition for smaller lenders that are servicing consumers and SMEs. In particular, the aim is to ensure that smaller lenders can maintain access to funding during the period of economic and financial market disruption by the Government making targeted investments in structured finance markets.5
The role of the SFSF is also complementary to the Australia Business Securitisation Fund (ABSF), which is an existing fund administered by the AOFM. Established in mid-2019, the ABSF has $2 billion in capacity and is designed to support the provision of finance to SMEs on more competitive terms. The AOFM called for proposals for the first round of ABSF investments in December 2019.6

Funding released through the ASBF and SFSF

The AOFM announced on 27 March 2020 that it had released the first funds from the SFSF.7 On 2 April 2020 the AOFM announced that it intends to invest $500 million into a warehouse vehicle sponsored by Judo Bank, a challenger bank focused on the SME sector. This will consist of a $250 million funding tranche allocated from the ASBF, and a further $250 million in a different security class issued by the same warehouse facility on a temporary basis through the SFSF.8
The AOFM noted that other shortlisted proponents from the first round of ABSF investments will be automatically considered for investment by the newly-created SFSF.9 It was reported that several FinTechs are likely to apply for funding through the SFSF.10
The AOFM reported in July 2020 that as at 30 June 2020, total SFSF investments and commitments were just over $2.7 billion, with three main work streams for the provision of SFSF support: public (primary and secondary) markets; private (warehouse) markets; and forbearance (the establishment of arrangements to enable small lenders to provide forbearance for borrowers experiencing COVID-19 related hardship).11

SME Guarantee Scheme

The government announced on 22 March 2020 the Coronavirus SME Guarantee Scheme, designed to support SMEs ‘to get access to working capital to help them get them through the impact of the coronavirus’.12 Under the Scheme, the Government will guarantee 50 per cent of new loans issued by eligible lenders to SMEs. The Treasurer stated that this support ‘will enhance lenders’ willingness and ability to provide credit to SMEs’, with the government guaranteeing up to $20 billion in order to support $40 billion of lending to SMEs.13
Under the scheme, the Government will provide eligible lenders with a guarantee for loans with the following terms:
SMEs, including sole traders, with a turnover of up to $50 million.
Maximum total size of loans of $250,000 per borrower.
Loans will be up to three years, with an initial six month repayment holiday.
Unsecured finance, meaning that borrowers will not have to provide an asset as security for the loan.14
By mid-May 2020, the government had approved 41 lenders to participate in the scheme, including ten FinTech lenders. Non-bank lenders participating in the scheme include: Banjo Loans; Get Capital; Judo Bank; Lumi Finance; Moula; On Deck; Prospa; Speedy Finance; Spotcap; and Tyro Payments.15
Treasury informed the committee that as at 19 June 2020, seven of the FinTech lenders participating in the scheme had made 632 loans to the value of $29.4 million (with the three remaining FinTech participating lenders yet to report data).16 As at 20 July 2020, the SME Guarantee Scheme as a whole had supported loans worth $1.5 billion to more than 15,600 businesses.17

Expansion of the scheme

On 20 July 2020 the Treasurer announced an extension of the scheme, with a second phase to commence from 1 October 2020. Key changes to the Scheme include:
extending the purpose of loans able to be provided beyond working capital, such that a wider range of investment can be funded;
permitting secured lending (excluding commercial or residential property);
increasing the maximum loan size to $1 million (from $250,000) per borrower;
increasing the maximum loan term to five years (from three years); and
allowing lenders the discretion to offer a repayment holiday period.18
The Treasurer stated that the next phase of the scheme ‘will help businesses move out of hibernation, successfully adapt to the new COVID-safe economy and invest for the future’.19

Boosting cashflow for employers

On 22 March 2020 the government announced it would be providing payments of up to $100,000 to eligible SMEs and not-for-profits with annual turnover of under $50 million, with a minimum payment of $20,000. These payments flow through to employers automatically from the Australian Taxation Office (ATO) on the basis of salary and wages payable to employees, with the aim of helping businesses’ and not-for-profits’ cash flow so they can keep operating, pay their rent, electricity and other bills and retain staff.20
This measure is expected to benefit around 690,000 businesses employing around 7.8 million people, as well as around 30,000 not-for-profits, at an estimated total cost of $31.9 billion.21

Submitter views on COVID-19 support measures

Submissions commented on the ability of FinTechs to access financial support programs and stimulus funding measures announced by the government in recent months.
Zip expressed support for the stimulus initiatives the government had already implemented to assist Australian businesses through the crisis, but suggested it was ‘critical’ that these support packages be extended to include established FinTech businesses. It noted:
Many of these businesses do not currently qualify for any of the support packages available and we support the extension of these packages to ensure the last eight years of innovation and competition are not destroyed by the current crisis.22
Zip also asserted that FinTechs needed to be supported to continue to compete against the Big Four Banks, which were being bolstered by government support packages and using the crisis to ‘advertise aggressively’ and increase market share as smaller players were unable to compete. Zip noted that Buy Now Pay Later (BNPL) players like itself had ‘significant distribution’ and supported a large part of the economy through their customers and merchants, and in that sense were no different to the Big Four Banks.23

Access to AOFM funding mechanisms

Zip recommended that the government offer ‘priority access’ for FinTech and BNPL lenders to the AOFM funding scheme, the $15 billion SFSF, provided that the relevant qualifying criteria were met.24 Zip explained why it believed that priority access to the AOFM scheme was required:
BNPL companies currently use public market and bank securitisation and warehouse facilities. Using the current AOFM program to support these facilities would provide strong additional support to the BNPL sector. Certainty and access to debt funding allows fintechs and BNPL to continue to offer their services to millions of Australian consumers and thousands of Australian retailers.25

Access to low-interest loans through the RBA funding facility

Several submitters suggested broadening access to the RBA’s $90 billion term funding facility, which will provide capital to ADIs at a borrowing rate of 0.25 per cent, in order to facilitate ADIs lending to small and medium enterprises.
Zip suggested that the government’s low-interest loan package be extended to include established and emerging FinTech lenders such as neobanks and BNPL providers. It argued that doing so would allow businesses like Zip to support their existing customers with interest and fee waivers, as well as repayment moratoriums, similar to those offered by the Big Four Banks. Zip asserted that excluding certain sections of the economy provided the Big Four with a competitive advantage and would work to stifle the innovative and competitive landscape.26
86 400 commented that access to RBA funding at preferred interest rates as a mechanism to stimulate the economy is ‘typically directed to established large scale players’, with the TFF being a case in point:
Providing substantial funds at 25 bps allows large banks to directly target retail borrowers with Government subsidised rates that new entrants are simply unable to match. This approach appears perfectly rational at a macro-economic level – ensuring stimulus with broad coverage – however it ignores the impact at a micro-level, which is that the biggest banks can establish a stranglehold on new business flows and choke effective competition.27
86 400 submitted that this issue ‘could be quickly and easily addressed by the RBA’ by providing $200 million from the TFF to 86 400 and other neobanks, rather than making TFF funding allocations based on the capital ratios held by ADIs.28
FinTech Australia commented on access to the TFF, arguing that it exacerbates problems with a lack of competition in the banking sector:
[The TFF] is not directly available to neo banks and challenger banks where that bank does not lend to corporates or SMEs. Even where a neo bank or challenger bank lends to these sectors, they do not have the large self-securitised mortgage books that are used by the major banks as collateral for the TFF. Competition in the Australian banking sector suffers a great detriment from this discrepancy, as the access to cheaper funding enables major banks to lower the cost of overall funding. This in turn allows major banks to subsidise their lending businesses (including residential mortgages) by being more aggressive on acquisition. Additionally, while [APRA] has granted capital buffer relief to ADIs, due to the early stage of neobanking in Australia many neo banks have not had sufficient time in existence to be able to mature to the point of having excess capital buffers.29

SME Guarantee Scheme

Zip recommended that the government extend the SME Guarantee Scheme to FinTech lenders and BNPL companies that provide credit to consumers. Zip argued that extending this program would provide ‘significant support’ for new businesses which would support millions of Australian consumers and retailers during the pandemic. It explained:
It is critical that retail and consumer spending is supported throughout this challenging period. As a very responsible provider of credit (1 in 100 Zip customers [are] late in any given month compared with 1 in 6 for credit cards), Zip is well placed to continue to offer consumers choice and provide competition to the Big Four Banks.30
Brighte recommended similarly that the definitions of ‘eligible loan’ and ‘participating lender’ under the scheme be expanded to allow more FinTech lenders to access the scheme, for example, including BNPL services provided for businesses.31

Other support options for FinTech lenders

The Australian Finance Industry Association (AFIA) noted the constraints of the SFSF and the SME Guarantee Scheme in respect of smaller lenders including FinTechs:
[The] SFSF and the [SME Guarantee] Scheme are geared towards the larger banks or larger non-bank lenders, and will not provide support to smaller innovative lenders. Furthermore, while the ‘6 month moratorium’ announced by the banks has been an important measure to calm the community, it is having a significant impact across lending markets, putting pressure on smaller lenders that are not permitted or unable to provide similar initiatives to their customers.
Smaller lenders are challenged in being able to participate in the SFSF and Scheme because of their business models, existing funding arrangements and/or tailored product range.32
AFIA recommended that the government create a new fund to provide liquidity support and access to alternative funding sources for smaller lenders. This additional initiative ‘would recognise the complexities of the lending market, the varying needs of Australians through the COVID-19 crisis, and the need for Government and industry action to focus on the immediate challenges, with the longer term and recovery in mind’.33

Refinements to ESVCLP and ESIC incentives

Venture capital investment incentives

Venture capital (VC) is a specialised form of finance suited to high potential, early-stage businesses targeting rapid growth. The Department of Industry, Science, Energy and Resources34 (the department) administers the Early Stage Venture Capital Limited Partnerships (ESVCLP) program to encourage VC investment in businesses in Australia including FinTechs.35
The ESVCLP program provides tax exemptions to domestic and foreign investors on their share of the fund's income and capital gains. Additionally, investors receive a 10 per cent non-refundable tax offset on capital invested during the year. The partnership is not considered a taxing point and the income and gains flow through to investor, which avoids double taxation.36 Through the ESVCLP program, a total of $1.17 billion has been invested since partnerships commenced investing in 2010-11.37
The department also administers the Venture Capital Limited Partnerships (VCLP) program, which is aimed at increasing foreign investment in the Australian VC sector. VCLPs also provide flow-through tax treatment, and eligible foreign investors receive a capital gains tax exemption for gains made on eligible investments.38 Through the VCLP program, a total of $7.82 billion has been invested since partnerships commenced investing in 2004-05.39
The department provided information on annual investment flows through these two programs, shown at Table 6.1.
Table 6.1:  ESVCLP and VCLP investment amount
Financial year
ESVCLP ($million)
VCLP ($ million)
FY 04/05
FY 05/06
FY 06/07
FY 07/08
FY 08/09
FY 09/10
FY 10/11
FY 11/12
FY 12/13
FY 13/14
FY 14/15
FY 15/16
FY 16/17
FY 17/18
FY 18/19
FY 19/20
Source: Department of Industry, Science, Energy and Resources, Answers to written questions on notice (received 13 March 2020), p. 2.
In relation to the ESVCLP program and the FinTech sector, the department noted:
Companies developing technology, including for use in the financial services sector, are eligible for investment by ESVCLPs and VCLPs. However, ESVCLPs and VCLPs are not permitted to invest in companies predominantly undertaking financial services activities. The close relationship between FinTech and these ineligible activities had given rise to uncertainty about the eligibility of FinTech investments and some stakeholders expressed concerns that this could constrain investment in Australian FinTechs. 40
To counter these concerns, government amended the legislation governing the programs in 2018 to make it clear that FinTech companies were eligible for investment through the ESVCLP and VCLP programs.41
The department submitted that program data ‘shows ESVCLPs and VCLPs are investing in FinTech and RegTech’:
In 2018-19 these partnerships invested over $42 million in 47 FinTech and RegTech companies. This is a significant increase over the last five years, when $6 million was invested in 4 companies in 2013-14.42

Early Stage Innovation Companies incentives

Since July 1 2016, investments made in qualifying Early Stage Innovation Companies (ESIC) have been eligible for tax incentives.43 The ESIC incentives provide eligible early stage investors who purchase new shares with:
a non-refundable carry forward tax offset equal to 20 per cent of the value of their qualifying investments, capped at a maximum tax offset amount of $200,000; and
modified capital gains tax (CGT) treatment, under which capital gains made or accrued on qualifying shares that are continuously held for at least 12 months and less than ten years are exempt from CGT. Capital losses made or accrued on shares held less than ten years are also disregarded.44
The department noted that in the first two years of the scheme (from July 2016), around $630 million was invested in ESICs.45

Submitter views on the ESVCLP and ESIC programs

The committee received evidence from a number of submitters that there was room for improvement in the ESVCLP and ESIC structures.
In regard to the ESVCLP, SquarePeg Capital (SquarePeg) informed the committee that the current policy setting needed to be clarified to ensure that FinTechs and investment firms did not have to operate in a grey area.46 It noted:
We continue to be concerned by the complexity of the ESVCLP regulation. In particular, as it relates to fintechs, the distinction that limits the eligibility of lending businesses in the legislation causes a higher hurdle rate for such fintechs.47
Mr Anthony Holt, co-founder and partner of SquarePeg, further explained to the committee the distinction in the ESVCLP eligibility criteria that caused concern:
It [the distinction] is between people in the business of providing platforms versus people in the business of lending. Those who are providing platforms, as a general matter, will fit under the legislative requirement to be an ESVCLP-eligible investment. Those that are more specifically providing lending as a primary purpose—I can't remember the exact words, but there's a balance to what you're doing and, to the extent that the balance tips over more on the lending side, you will not be eligible for ESVCLP. It's hard to understand from an investor perspective why that distinction is made. There must be a reason. But it means that it's an element of judgement and an element of evolution for us when we're looking at what's eligible and what's not eligible. That makes it difficult to assess where and how we invest.
Because of the structures that we've got in place because we invest in Australia as well as in international markets, we've got a degree of flexibility that others in the industry don't have and we can use our international structure to invest in non-ESVCLP-eligible investments, and so to an extent it affects us less, but the logic of it not being ESVCLPeligible is something that is hard to understand and adds a burden for us in making the assessment. It makes things more difficult than they need to be.48
FinTech Australia noted that current legislation prohibits VCLPs and ESVCLPs from investing in authorised deposit-taking institutions (ADIs). It noted that there were potential tax advantages for an investor using a VCLP or ESVCLP, and these may encourage investors to look specifically at neobanks if the ADI investment restrictions were lifted.49
The Australian Computer Society (ACS) recommended changes to the ESIC incentives. It noted that from a government policy lever perspective, the attraction of a successful ESIC regime was that increased investment does not mean forgoing tax revenue.50
The ACS outlined why it believed changes to the ESIC incentives would positively impact Australia's economy:
Capital is globally mobile. Australian investors are sophisticated so they will allocate their investments based on where they will achieve the greatest return. Reforming and enhancing the appeal of ESIC will ensure a greater share of Australian private capital is retained and invested in Australia rather than going overseas – capital that can expedite our future economic growth.51
Additionally Mr Andrew Johnson, ACS Chief Executive Officer, observed:
At a high level, if we had a broader definition and less bureaucracy around our scheme, encouraging more people to participate, that would go a long way to improving capital flows. In an environment where the fiscal environment is very tight, if we can ensure more Australian capital stays in country rather than going overseas—capital is globally mobile, just like labour is—the economy will benefit.52
The ACS provided information on how Australia's ESIC incentives compared to similar programs in the United Kingdom (UK):
Deloitte Access Economics has benchmarked ESIC to the United Kingdom's Enterprise Investment Scheme and Seed Enterprise Investment Scheme (SEIS). This stylised scenario assumes an initial investment of $200,000 and holding shares for over twelve months across all schemes and hence avoiding capital gains tax.
The analysis indicates an effective return of 18.5% for investments in early-tech companies under Australia's ESIC, compared to an effective return of 38.6% for investors in the UK's SEIS – more than double the rate of return.53
The ACS put forward three recommendations on the ESIC tax incentive for the committee to consider:
1.) Streamlining red tape by abolishing ESIC’s 100-point innovation test requirements with the highest use innovation test requirements (such as enforceable patents, participating in an eligible accelerator programme) converted to examples contained under the Principles Based Innovation Test Requirements.
2.) Broadening the criteria defining an “early stage company” eligible for ESIC investment lifting the criteria capping from $1m or less total expenses in the previous year to $2m or less and raising assessable income caps of $200,000 or less the previous income year to $400,000 or less.
3.) Lifting the income tax relief from 20% upfront offset to match the SEIS of 50% upfront offset.54
The ACS contended that remodelling ESIC to 'match and better' the UK equivalent would be a low risk, easy to implement initiative that would help increase capital flows into the FinTech sector. It posited that the costs to the budget would be offset by tax receipts through employment growth and increased GST and capital gains revenue.55

Suggestions on ESIC and ESVCLP programs following the COVID-19 pandemic

Submissions lodged following the commencement of the pandemic restrictions noted that access to venture capital funding for start-ups and scaleups, including FinTechs, is likely to become significantly more difficult during the economic downturn currently being experienced.
The Australian Innovation Collective provided a submission in March 2020 which stressed the importance of refining the Early Stage Investment Company (ESIC) program as part of a suite of measures to ensure that high-growth start-up companies can survive the current economic shock caused by the COVID-19 pandemic and attract private capital. It stated:
A black swan event like COVID-19 will make investors even more risk averse in the absence of urgent action.
It is vitally important that Australians understand these opportunities are available to them and are encouraged to take them.
Policies that lead to a paradigm shift increase in equity investment in startups and scaleups rather than the current approach which is regarded in the industry as incremental and restrictive.56
It argued that, at a broad level, the following changes are required:
Make it easier for companies to qualify for early stage investment incentives by simplifying the criteria and application process for ESIC.
Adjust the incentive levels and limits imposed on participating retail and sophisticated investors.
Replace the existing ESIC eligibility criteria for companies and investors.57
The Australian Innovation Collective argued that increasing the tax deductions available under the ESIC scheme, and making them accessible upon capital deployment, could incentivise investment decisions in the next 36 months to help spur economic recovery.58 It commented that high growth technology based companies ‘are the simplest way to reboot a flagging economy’.59
Several other submitters urged similarly that the ESIC scheme be expanded, in line with the UK model, in order to provide an injection of private capital into FinTechs and the broader start-up sector.60
FinTech Australia also drew attention to opportunities to strengthen the Early Stage Venture Capital Limited Partnerships (ESVCLP) program to maintain investment in the FinTech ecosystem at this time, by:
extending the non-refundable carry forward tax offset from, for example, 20 per cent to 30 per cent; and
expanding eligible asset classes under the scheme, which could benefit neobanks as well as FinTechs in the areas of property development, land ownership, finance, insurance or making investments directed at deriving passive income.61
FinTech Australia argued that the current restriction on investment into ADIs is particularly problematic:
Access by neo banks to capital could also be facilitated by championing initiatives such as more generous tax incentives for investments in early stage fintechs (including neobanks) for amounts up to a certain amount (for example, $20m). Unfortunately, current legislation prohibits venture capital limited partnerships (“VCLP”) and ESVCLPs from investing in [ADIs]. There is, however, a potential tax advantage for an investor using a VCLP/ESVCLP, which may encourage these investors to specifically look at neo banks if ADI investment restrictions are lifted. We also note that ADIs are also specifically excluded from certain investor incentives that are made available to foreign investors that are available to other companies.62

Creation of Corporate CIV and Limited Partnership CIV

The committee received evidence arguing that Australia's current set of collective investment vehicles (CIVs) were not structured in a globally recognisable way.
The Australian Investment Council (AIC) highlighted that CIVs are an important structure to facilitate the aggregation and pooling of capital to be invested into Australian start-up and scale-up businesses. However, it argued that Australia's current suite of CIVs were not competitive with other similar markets offshore.63
The AIC emphasised that a 'world-class' CIV regime was key to building and expanding on the pool of capital that could be attracted into FinTech and RegTech businesses in Australia. It informed the committee that a number of large international investors had identified that the current structure of Australian CIVs was a material deterrent for investing more into Australia. The AIC stated:
As a result, these international investors are making decisions to invest in jurisdictions that have CIV regimes they are more familiar with. This means Australia misses out on significant volumes of capital simply because our policy infrastructure is not as competitive and consistent with global practices as it should be.64
Mr Yasser El-Ansary, Chief Executive of the AIC provided further detail to the committee at a public hearing on why international investors preferred more familiar CIVs:
One of the areas of feedback that I hear the most about when it comes to effectively selling Australia as an investment destination to offshore providers of capital—offshore pension funds or sovereign wealth funds in particular—is that they are unfamiliar and therefore sometimes uncomfortable investing into vehicles such as managed investment trusts here in Australia, which we have a deep propensity for, because they are vehicles that are not common, standard or consistent with other markets with which we compete globally. So their preference is to invest into vehicles with which they are familiar, and a limited partnership vehicle is exactly that. It is a vehicle that is used in markets all over the world. It is a vehicle used in markets with which we're in competition for capital, and the feedback from those investors is: 'When you as Australia start to look consistent with some of the other markets that we are already investing into, we will take another look at you. But at the moment there are too many question marks around investing into Australia when we simply don't understand this vehicle that you have.'65
The AIC observed that in 2016 the government committed to introducing two new types of CIVs (a Corporate CIV and a Limited Partnership CIV); however, it noted that these have not yet been implemented. The AIC recommended that a Limited Partnership CIV aligned with international best practice be fast-tracked, with a target start date of 1 July 2021.66
The AIC further argued that for Australia to achieve an investment environment for FinTech and RegTech that is competitive with other jurisdictions the investment framework should: have clear parameters; be conducive to domestic and international investment; and align with best practice in other jurisdictions. It added:
Implementing CIVs as a priority will reignite Australia’s competitiveness as an investment destination as investors are familiar with this form of investment vehicle. This in turn will increase the pool of capital for investment which will have the flow on benefits of economic growth and attracting talent.67

Collaboration between large and small businesses

The committee received evidence indicating that there was a role for government in encouraging collaboration between large businesses and start-ups in the FinTech and RegTech sectors.
For example, global consulting firm A.T. Kearney noted:
Government has a significant role to play in promoting the adoption of fintech and regtech and creating the conditions were these technologies can thrive. These technologies promise to enable better and cheaper financial services products and more effective and efficient regulatory compliance, but this will not happen in a vacuum. Realising their potential is dependent on creating the conditions for entrants to emerge, supporting competition and protecting the safety of consumers and businesses.68
Mr Rob Feeney, partner at A.T. Kearney, further explained:
We don't think you're [the government] the only player in this ecosystem, but we think you're one of the most significant players, and there's a large role. We think that your role is around promoting adoption, creating the conditions for success for many of these institutions and companies, helping to drive innovation and competition, and helping to remove funding barriers and enable some of these companies to develop.69
A.T. Kearney gave the example of the Financial Sector Technology and Innovation scheme in Singapore, where the government provides direct investment to encourage collaboration. The scheme includes direct funding elements and aims to allocate $168 million over the next five years to encourage financial institutions to collaborate with FinTech start-ups.70
FinTech Australia informed the committee that 'difficulties abound' for FinTechs entering into commercial contracts with incumbents:
Fintech businesses have found that although corporates speak the language of innovation, the process to adopt new technologies are outdated. Issues arise around procurement processes, legal compliance, technology review and onboarding process and timelines. For instance, fintechs are frequently asked to provide 3 years of financial data. Where a business is under 3 years old this is a practical impossibility. Even where businesses are over 3 years old, they are likely to reinvest all profits into the business, meaning that companies cannot rely on the same metrics to assess the viability of fintechs which they would incumbents. Taking over 12 months to sign a contract may make sense for the corporate incumbent but may be a significant and potentially unsurmountable, or even fatal, barrier for the fintech to enter into the arrangement.71
FinTech Australia argued that the government should incentivise companies of all sizes that have the potential to generate long term economic value, jobs, and contribute to the intellectual and technological future of Australia. It suggested that collaboration between large incumbents and small start-ups could be incentivised by providing tax incentives to businesses which use FinTech or other start-ups in their business, even for a trial period.72
FinTech Australia also suggested that the government could help to educate and raise awareness in the business and broader community about the benefits of collaboration:
As developers of new concepts and products, fintechs and startups also often encounter marketing difficulties as users generally do not accept their new concepts or products. The government could assist with this problem through education campaigns (similar to the CDR campaign) that could, for example, demonstrate to the public what fintech is or what fintech products are, and they benefit they can bring to an individual or business.73
FinTech Australia noted that some international jurisdictions (such as New Zealand and Singapore) were already taking this approach, with these governments producing online and television content to help promote and support the FinTech ecosystem.74
The RegTech Association advised that there were challenges for RegTech startups looking to collaborate with large businesses, and listed procurement and IT security as two of the key obstacles. As a way to overcome this, Ms Deborah Young, Chief Executive Officer of the RegTech Association explained that her organisation was attempting to gather a group of procurement managers to work through the problems cooperatively:
We would like to attempt to see if it's possible to gather a group of procurement heads. In fact, we tried to do that late last year. We intend to convene that to get together a group of procurement heads from large institutions, such as the banks, and ask them about looking at ways that they are currently onboarding small companies and to see what are the low-hanging fruit on the things that they might be able to address and change.75
Ms Young also mentioned that large businesses should consider a 'dual track process' for how they onboard new technology, with one track for 'big players' and separate, less onerous track for small or startup businesses.76
The committee received evidence relating to the ways in which FinTechs present challenges to incumbents, including dealing with legacy systems and comparatively more regulation, as well as responding to competitors who are not bankers but entrepreneurs and technology specialists. However, the committee heard that Australian banks are responding to the growth of FinTech companies.
ANZ indicated that it 'is a strong supporter of, and investor in, fintech' and has three groups that focus on ways of supporting FinTech innovation: New Business Labs, ANZi Partnerships and ANZi Ventures. ANZ reported that [i]nvesments made through ANZi focus on four key areas: homeownership, trade and capital flows, small and medium businesses and open data'.77
Speaking to the House of Representatives Economics Committee, Mr Shayne Elliott, CEO of ANZ, indicated that the ANZ is an active investor in about eight FinTech companies, with all except for one based in Australia. Mr Elliott provided more detail that the companies:
…offer either critical pieces of technology infrastructure—which will be important for us, to build a better ANZ—or, mostly, a unique or really valuable customer proposition that we cannot offer but would like to embed into the ANZ service proposition. It's public information. We're a major shareholder in Lend[i]. We're a shareholder in Zip and DiviPay. There are a range of companies that we have invested in and partnered with. We're not a venture capital firm; we have to partner to build better services and products for our customers. I think we are well ahead on that.78
In April 2020 during the COVID-19 pandemic ANZi Ventures invested in Australian FinTech Airwallex as part of a Series D funding round. Mr Ron Spector, Managing Director of ANZi Ventures, characterised the investment as a 'strategic' move and indicated that ANZi Ventures was looking forward to working with Airwallex.79
The Commonwealth Bank (CBA) mentioned the work of its Innovation Lab and its partnership with the World Bank 'issuing the world's first bond issued on a blockchain (Project Bond-i).80 CBA has invested in Swedish BNPL firm Klarna, becoming the company's exclusive partner in Australia and New Zealand.81
In July 2019 CBA announced it would use 'artificial intelligence technology to advise customers…as digital banking shifts from facilitating transactions to provision personal, customised insights to customers based on data'.82 CBA launched a startup incubator program in February 2020 called X15 Ventures, with the aim of launching 25 new FinTech startups within five years.83
National Australia Bank reported on some of its collaborations such as a new digitised receipt product developed in partnership with Slyp, as well as ‘the launch of Xero NAB Payments'.84
Westpac Group indicated that it is a corporate partner for the establishment of Stone & Chalk which is a 'start-up hub focussed on the FinTech sector'. It has a $150 million Reinventure Fund which is 'a venture capital fund focussed on FinTech and adjacent industries that embed financial services'. Westpac also holds an 'annual innovation challenge' and has participated in the development of Lot Fourteen in South Australia which is an 'innovation hub which is a central element of the $551 million Adelaide City deal'.85

Encourage superannuation funds to invest more broadly

The committee received evidence that there may be ways for superannuation funds to appropriately invest capital in the FinTech sector.
In response to the committee's query about what measures could be taken to support the FinTech sector's ability to raise capital from other types of institutional investors, company accelerator Startupbootcamp Australia mentioned an initiative in Singapore that had been successful:
The best example for this would be Singapore. The government offers large tax credits to incumbents for putting together VC funds that encourage and develop the startup space. This removes the risk for funds like superannuations as there is a built in offset to the investment.86
Mr Brian Collins, Fintech Managing Director of Startupbootcamp, also noted that any initiatives to incentivise investment from superannuation funds would need to be different to measures taken to incentivise investments by individuals. He noted:
On the corporate or the superannuation side, to give a broad answer, it is any way you can help reduce the risk element that they're going to take at the beginning of the process as they're first starting to do these investments.87
Mr Collins also noted that there were several different incentive models that could be used, including a tax credit model, a rebate model, or a matched investment model.88
Mr Collins provided further detail on how it would be possible to use a layer of intermediation and risk management to create the right structures to encourage superannuation funds to invest:
One is investing into an existing VC function [as per the Singapore example above]; the other is creating a joint venture—possibly between multiple superannuation funds. But the key with any of the fund processes is twofold. One, we need to ensure that those funds have what are called floors and ceilings on investments. We need to ensure that the floor is low enough that they're incentivised to work with early stage start-ups, which is where that funding gap is right now.89
The ACS put forward a suggestion for a voluntary tech investment accord that superannuation funds could choose to enter into. It described the idea to the committee as follows:
This recommendation is the development of a voluntary accord with superannuation funds where signatories commit to allocating up to 0.5% of their funds under management to high growth tech startups as a higher risk asset class.
Ultimately, this initiative is really about cultural change and sending signals to the market that Australia is serious about improving the sophistication of our economy.90
The ACS pointed out that technology was an increasingly important sector in the ASX, with 21 technology companies with market capitalisation over $1 billion with technology and telecommunication companies making up approximately six per cent of the ASX's total market capitalisation.91
It submitted that a 0.5 per cent voluntary accord would not be a 'stretch target' and that as voluntary measure, the accord would be more about government 'facilitating a conversation' with superannuation funds that may wish to differentiate themselves in the market.92
Stone & Chalk put forward a more specific recommendation to increase superannuation fund investment in start-ups. It suggested that the government provide sufficient incentives to individual retail and wholesale taxpayers to invest in Australian start-ups and scaleups that qualify for ESIC, allowing 100 per cent Capital Gains Tax relief for investors and a 100 per cent tax loss offset up to a threshold limit of $400,000. Stone & Chalk recommended that should the government choose to exclude retail investors from directly accessing such incentives, then the government should instead mandate superannuation funds to provide access to this investment class to retail investors.93
FinTech Australia informed the committee that its members were concerned about the relatively low proportion of superannuation funds that invest in FinTechs and start-ups, outlining its understanding of the situation as follows:
This low rate of investment seems to be a product of the superannuation funds’ individual investment processes and risk appetites, with some superannuation funds expressing that the same level of effort and due diligence is required to invest $100,000 as it is to invest $100m. This results in a lack of incentive for superannuation funds to invest in early stage companies that are raising smaller amounts of capital.94
In order to rectify this trend, FinTech Australia asserted that superannuation fund investment processes and frameworks need to be modified to better accommodate smaller companies. It further noted that promoting investment in FinTechs by superannuation funds would also provide benefit to fund members, as it would allow a diversification of that fund’s portfolio and risk profile.95

Consideration of national interest issues in relation to investment capital

When considering how to attract investment capital from overseas into Australia's FinTechs and RegTechs, it was noted that national interest matters may need to be considered due to the sensitive nature of these businesses, in terms of both the data they acquire and the services they provide.
The committee explored with several witnesses at a public hearing whether the government should be prioritising investment from countries aligned with Australia's national interest goals, such as the partners in the Five Eyes intelligence alliance.
Mr Robert Feeney, Lead Partner, Digital Transformation Practice at A.T. Kearney, commented:
[The question is] something like: can we identify a set of very trusted allies where we would say capital from those particular companies or those particular areas should be able to be invested in Australian technology, and would that help us overcome potential capital restrictions in Australia? I think that's really interesting…it's certainly something that I think is worth exploring, particularly if you could find areas where not just the capital but, more importantly, the expertise could be accessed.
Obviously financial interest comes with that investment, but along with that financial interest also comes the particular expertise of the person making the investment. If we were to consider organisations where we felt that they had expertise that would help our Australian companies get a leg-up, I think that would be very beneficial.96
Professor Mark Kendall, CEO of MedTech firm WearOptimo, stated:
Certainly, when it comes to foreign investment, our federal government has been looking at this and—I understand as a result of COVID-19—has changed the Foreign Investment Review Board position to being more careful about what we do with foreign investment. I think there's a good case to argue for some preferential terms for parties within the Five Eyes system, building on our cultural links and capital and all the rest. I think that would help. It would certainly help Australians, as we go to build out our medtech technologies, if we have that more level playing field to make it more straightforward for deployment of capital— for someone from the US, for instance, to invest into an Australian technology.97
The committee intends to explore this issue further in the remainder of its inquiry and provide further views in its final report.

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