Fintech stocks took a hit in 2022, can they bounce back in 2023 and beyond?

• The Fintech area has taken a hit this year along with the wider Tech area
• Stockhead catches up with Fintech Australia Chair Simone Joyce to get her insights
• A quick look at the performance of ASX listed Fintech stocks

After hitting pandemic highs, the tech sector has been on the back foot for most of 2022.

Both Nasdaq and ASX 200 Tech [XIJ] indexes are on the ropes, down 30% this year as interest rates rose at the fastest pace in decades.

High interest rates tend to hurt growth stocks – and more specifically technology stocks – because of the discounted cash flow models used in their valuations.

As a result, the Fintech space, which is part of the wider Tech space, has also been hit hard.

Fintech companies grew exponentially during the pandemic, driven by e-commerce spending and a shift from physical to digital payments. But their downfall this year has been as spectacular as their rise.

But despite the setback, most experts believe the sector will bounce back as the technology they created has become an essential part of our everyday lives.

“When you think about it, whether it’s paying for your groceries, or looking at a comparison product for insurance, or thinking about taking out a loan, every one of us interacts with some kind of financial services on a daily basis,” Chairman for Fintech Australia, Simone Joyce, told Stockhead.

“And fintech is basically the companies that improve those experiences for us.”

Challenges still exist

From an investment perspective, Joyce believes that the Fintech sector still faces macro challenges going forward.

“The unfavorable investment conditions that we saw this year are likely to continue into 2023,” she said.

Impending regulations could be another headwind, especially for sectors such as buy-now-pay-later (BNPL).

But overall, Joyce believes that regulations are beneficial for the sector as a whole.

“We’ve had a lot of regulatory changes that are actually evolving to help Fintechs establish and grow safely and appropriately, so that’s good.”

According to Joyce, the biggest problem for Australian Fintechs is not regulation, but a lack of funding to support budding companies in their growth journey.

“Unlike the US or the UK, our capital structure is not as robust or as large, and that is the biggest challenge most Australian Fintechs face.”

“To the extent, Fintech Australia supporting our members on their funding journey by ensuring we can make introductions to suitable investors when the time is right, Joyce said.

Which Fintech segments are booming?

IPOs have slowed to a trickle in 2022, but the good news is that most Australian Fintechs were still able to raise capital this year.

According to the latest EY-Fintech Australia census, a majority or 54% of Aussie Fintechs said their capital raising expectations have been met.

Only about 29% of companies said they didn’t collect as much as they thought they should.

The payments segment is booming, and remains the top Fintech play in Australia amid rapid change in our payments ecosystem.

There have been many success stories in the payments space this year, including Joyce’s own startup, Paypa Plane.

Paypa Plane enables banks to quickly upgrade their payment services for business customers without changing their existing infrastructure. In February, the Commonwealth Bank bought a 20% stake in the start-up.

Another hot spot in Fintech is the evolving Consumer Data Right (CDR) reform, which is attracting many new startups.

Since its adoption in 2019, the CDR reform is slowly maturing and has already been rolled out to banking and energy, with telecommunications as the third sector.

CDR basically gives consumers the choice of whether they want to share their data with companies, with full visibility of who it is shared with and the purpose of sharing it.

“Wealthtech for example is a very fast growing segment because it leverages CDR,” Joyce explained.

Wealthtech is essentially a platform that uses emerging technologies such as artificial intelligence (AI) to offer an alternative to traditional wealth management firms.

Robo-advisors, which use artificial intelligence to advise users on investment options, are an example of a wealth technology product.

BNPL’s faces major hurdles but…

Meanwhile, the BNPL sector has gone through its worst year since its inception, with many stocks plunging to their 2022 lows.

The sector faces several headwinds at once.

First, interest rates have risen rapidly this year, and it is the first time the sector has ever had to deal with a rising interest rate cycle, which puts a lot of strain on the business model.

High interest rates not only increase the cost of financing, but they also reduce people’s ability to make purchases and cause a higher proportion of defaulting customers.

Second, the Albanian government has released a discussion paper that is expected to tighten the regulatory screws on the sector.

Among the options being considered by the government is a proposal to completely bring all BNPL companies under the Credit Act, similar to what is currently expected of credit card companies.

For consumers, this regulation means, if it is adopted, that there will be an extra credit check before they can be registered as a BNPL user.

“There has definitely been a lot of media attention on listed Fintech companies, particularly the BNPL sector,” Joyce says.

“People tend to look at the BNPL sector first because there are more companies listed in that area, so it’s easier to get information about them.

“Because of that, we’ve seen BNPL shares fall faster, but it’s a dynamic sector, so we could potentially see them come back faster as well,” Joyce said.

Other experts believe that we are likely to see more M&A activity in the BNPL space in 2023 as players consolidate to survive rising rates and increasing competition.

Non-bank lenders in high demand

Lending outside banks, on the other hand, has boomed in recent years, particularly following the conclusion of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

More Australian borrowers are turning away from the big four to do their financing with these alternative lenders, most of which offer digital-only services.

Given that they are not burdened by the physical and regulatory capital requirements of traditional banks, these lenders are more nimble and can operate at a much lower cost base.

They have also been able to target the fringe segments not touched by the big banks, such as the car loan market.

All in all, Joyce believes Fintech is a sector on the rise.

“As we move through 2023 and beyond, the general Australian population will interact more and more with Fintech,” she said.

“And that’s a very positive thing because it helps the economy going forward. And it helps people have better and safer experiences with their finances.”

SUBSCRIBE

Get the latest Stockhead news delivered free to your inbox.

“*” Must be completed

It is free. End the subscription whenever you want.