In the last five years the number of fintech start-up companies in Australia has increased fivefold, including in the financial services space where a new era of business is dawning.

Growing a new business, particularly in the very early days, can be challenging. For a fintech start-up with limited physical or tangible assets, access to secured funding can be a hurdle. These firms’ relative youth and lack of track record may act as a further barrier.

The fintech boom is causing a shift among some financial institutions as they begin to partner with the new entrants. The outcome is a win for both parties: the incumbents can capitalise on opportunities to grow outside of their core businesses while the start-ups access lending and business support from more experienced players.

“We’ve defined an approach to identifying emerging and small finance companies early in their lifecycle, and we’re happy to partner and support those we identify that make sense at an earlier stage than a traditional corporate and institutional bank usually would,” says Cameron Smith, a Director in NAB’s Financial Institutions Group.

In addition to secured lending and associated services, NAB has also arranged and sold unrated medium term notes for emerging growth companies.

Also, a separate dedicated team called NAB Ventures looks to provide venture capital funding to innovative technologies and technology related entities that align with NAB’s strategy. Its portfolio includes Basiq, which helps build financial apps, and BrickX, a platform for property investment.

Informed thinking

A good example of NAB’s approach is the partnership with Afterpay Touch Group (Afterpay), one of a new wave of emerging payment companies whom the bank is working closely with to develop into DCM issuers.

Afterpay, which has a A$300 million secured funding facility from NAB, is a sales-finance company that allows retailers to offer a lay-buy style service. Afterpay’s business model is typical of the trend emerging for a new generation of customers.

“Gen-Y, Gen-Z and i-Gen consumers are an increasingly important proportion of the market and moving towards dominance,” Smith says. “These customers prefer to directly purchase items or apply for various forms of finance products on their smartphones and tablets and then purchase, rather than go through a lengthy paperwork process. This preference is one aspect of what companies like Afterpay are tapping into.”

The Afterpay narrative has captured the attention of other fintech firms, such as Brighte. Active in the consumer finance space, Brighte is a digital finance platform connecting homeowners with renewable energy vendors and offering zero-interest payment plans for the installation of energy-saving devices such as solar panels and batteries.

Brighte’s business model suited NAB as a leading funder of green energy products, according to Smith. Brighte received a A$20 million funding facility from NAB in May this year.

Elsewhere in the sector, provider of business loans to Australian small-to-medium enterprises, GetCapital, obtained A$40 million secured funding facility with NAB and credit and digital payment company ZipMoney has also received NAB financing.

Multiple benefits

NAB has identified several benefits of partnering with emerging financial firms such as Afterpay, Brighte and GetCapital – not only through supporting businesses directly but, through funding facilities, indirectly to customers.

The partnerships also enable NAB to be nimble and drive the institution to consider changes in demographics and borrower preferences that might otherwise fall outside the traditional remit of a big-four bank operation.

“The workforce is moving towards a less-consistent employment format,” Smith says. “Consumers are more likely to have two or three jobs, work irregular hours or have irregular incomes. We realised we need to be involved with companies, such as Afterpay, Brighte and GetCapital, that have figured out how to penetrate various market segments.”

The benefits to the start-ups also go beyond pure financing. Many don’t yet have sophisticated treasury functions, so NAB provides access to trustee and trust-manager functions. “Their finance teams are so busy with the growth start-up phase of their business that they don’t have time to do that as well, so it can be quite helpful,” Smith says.

Evolution

Once funding and transactional facilities are in place, things don’t slow down. The initial tranche of debt funding from NAB typically gives the start-up the certainty it needs to grow the business’s origination channels – which then requires further debt or equity funding – and also gives external investors comfort.

As these companies mature and their involvement with debt and equity investors expands, NAB can provide a full range of services such as ratings advisory; DCM and securitisation; and distribution.

“The $50 million Wholesale MTN issued by Afterpay in May of this year was a great example of an unrated corporate raising non-dilutive capital from institutional, professional and sophisticated investors, adding to NAB’s existing funding facilities,” Smith says.