Fintech may be one of the hottest sectors in the Australian startup scene, but a leading entrepreneur-turned-investor believes the structure of early-stage tax incentives is hampering local venture capital from greater participation.

In response, Dom Pym, co-founder of Pin Payments and industry-changing neobank Up, has co-founded a dedicated fintech fund called Triple Bubble with plans to raise an initial $50 million to not just chase the next unicorn, but enable innovations that "disrupt the status quo and elevate the ecosystem".

"We're our own fintech," Pym quipped to Business News Australia on the sidelines of startup event SOUTHSTART in McLaren Vale, South Australia, last week.

His comment was in response to the observation his new fund, in challenging legacy investment structures to make it easier for Australians to invest in financial innovation, is essentially a fintech in itself - a Matryoshka doll of sorts.

Examples of Australian success stories abound in the space, from Pym's own founded companies to Tyro Payments (ASX: TYR) to Afterpay, which was acquired by Square owner Block for $39 billion at the start of 2022. The sector is regularly listed among the highest priorities for investors in State of Startup Funding reports, and accounts for 8 per cent of the Australia's Top 100 Young Entrepreneurs list.

However, not all is as it seems when it comes to VC's role.

"If you look at the actual cap tables, less than 3 per cent of that capital has come from [Australian] venture capital. Venture is restricted, and you might ask yourself why?" asks Pym, who also chairs industry body FinTech Australia.

He points to the Early Stage Venture Capital Limited Partnerships (ESVCLP) tax incentive as an underlying cause, given eligibility depends on approval as a regulated investment from AusIndustry, which tends to take a cautious approach to fintech.

"The tax incentives are great, and they're a catalyst for growth and momentum, but those tax incentives are actually the reason why most of the venture firms will not invest in fintech. Or if they do, they set up a separate side car structure," he says.

"Imagine if you’re Square Peg or Blackbird or AirTree and you want to invest in a fintech and you've got to set up a separate structure every time - by the time you get to 100 investments, it’s just too much to manage."

Pym says there are two reasons why the ESVCLP tax incentive system disadvantages fintech. The first is the perceived risk of fintech which means its status as a regulated investment is likely to be rejected, and the second relates to the impact of that on portfolio allocations.

"If you do then make an investment and you have a negative finding for the tax qualification, it doesn't just affect that investment, it affects your entire portfolio," Pym explains.

"So if you're a venture capital firm, why would you invest in a fintech and put at risk all of your health tech and your biotech and your other different AI businesses?

"There’s a sort of two-tier system in Australia where you qualify for the tax incentives or you don't, and if you don't, then it's harder," he says, clarifying this is not a problem that affects international VCs,

Pym adds there are plenty of domestic and global funding sources for fintech entrepreneurs but "Australian venture is not one of them"

"We realised that maybe what’s wrong is structural and we need a dedicated fintech fund that is created to back fintechs, because fintech is the largest sector of the startup community," says Pym, who established Triple Bubble with FinTech Australia deputy chair Brian Collins and Judy Anderson-Firth, the CEO of Pym's family office Euphemia.

"The structure that we use is an MIT, a managed investment trust, which is not an ESVCLP and that has its own constraints, but it gives us an enormous amount of flexibility.

"The tax incentives are not as much of a concern to us as they are other funds, and that gives us the freedom to invest," he says, also noting that the fund will invest in Australia, New Zealand and the Pacific Islands.

The reason for the name Triple Bubble can be boiled down to a series of trinities within the fund - three founders, three markets and three main areas of investment. The latter promises to open up more opportunity for investors to cash in on their investments through secondary markets.

"We're the first triple bubble fund in Australia. What that means is that we invest in public companies, fintechs, we invest in startups with primary equity, and we invest in secondary. Now, we’ve only got one secondary fund in Australia which is called Second Quarter," Pym says.

"Some of the big guys and others do secondary as well, but it's not really a booming market in Australia and we need it to be, because you need to be able to take capital off the table for founders and early investors.

"In Australia it's pretty difficult to do that because we don't have a thriving secondary market; we hope that we can be a catalyst for that, so that more funds will set up."

Pym says this allows investors to change their risk profiles and income, given that public companies, for example, pay dividends. He believes this will allow investors to change their risk curve, and thus back more innovative fintech founders.

"I think we're at the start of the fintech journey. I don't think we're anywhere near the end of it. There's so much legacy in banking and financial services.

"Australia has this enormous financial economy, one of the largest pools of capital in the world, yet the legacy and the moroseness of the systems and processes and the fraud is absolutely abhorrent; it's abysmal, so there’s an amazing opportunity that exists for fintech to disrupt."

Pym says that to do this entrepreneurs need to have curiosity and confidence - a trait he needed as well in founding Up, which along with his company Ferocia was acquired by Bendigo and Adelaide Bank (ASX: BEN) for $116 million in 2021.

"One of the things I have said since day one, since we started Up, is we will overtake the biggest banks in Australia in terms of customer numbers," he says.

The fintech founder asserts Up, as part of Bendigo and Adelaide Bank, is on track to overtake Commonwealth Bank (ASX: CBA) in banking customers aged under 35.

"No one knows about it. We're adding thousands of new customers a day, and we’re the fastest-growing bank in Australia, and we will overtake CommBank in the under 35 segment sometime in the next year," he says.

"Our retention and growth is quite extraordinary. You have to have the fortitude, the anxiousness, the disruptive nature, the confidence to actually believe that you can beat Westpac or CommBank or NAB or ANZ."

The fund is looking for investments in a wide range of areas including KYC/AML (know your customer/anti-money laundering), fraud, debit-credit card switching, and wholesale banking, to name a few.

"What we're hoping to do with the fintech fund Triple Bubble is to be able to back the ones that are not necessarily the winner, but that we as pickers are able to change the ecosystem in some way. Every bank in Australia copies Up today," he says.

"One of the things we did a little bit differently in the early days is something called ‘instant issuance’, which just means that you can open a bank account and instantly have the debit card in your Apple Wallet – when Google saw us doing it with Apple, then Google wanted to do it, and then we did it with Garmin and Fitbit, and others, with Samsung.

"All the big banks in Australia now do that, but we were the first to do that. So I think that fintechs have a role to play, not only in being a winner and creating a unicorn and doing an IPO; they have a role to play in disrupting the status quo, in elevating the ecosystem, in making the existing incumbents better."

Wholesale banking is of particular interest to Pym who highlights a lack of this service in Australia, where "CommBank is the bank of last resort" and "the Reserve Bank is there providing essentially wholesale banking services to the big banks".

"In the UK, one of the hottest startups in the last decade is Clear which is a wholesale bank, so there's an opportunity just as an example."

Pym is excited and optimistic about what the fund might bring, and believes the industry is going to see "more Afterpays coming out and selling for tens of billions of dollars".

"It's great if you find a decacorn or a unicorn or whatever, but we’re trying to back those $100 million, $200 million companies - if you can have 100 of them, it's probably better than just having one Afterpay," he says.

"What I'm trying to do is encourage the second generation of employees from those companies that have had a big exit and now have capital, maybe their founders, or maybe their early staff, to come and invest, not only in Triple Bubble but in other venture firms.

"I think fintech is really where my strength is, and that's where my reputation is, and so I’ve put that on the line trying to put together a fund to make a difference.

"It may not work, and that's OK, too. I take a lot of risks. A lot of the companies we invest in are not going to make it. A lot of the founders we invest in are not going to make it; they’re going to pivot and do something else. But someone has to take those risks. If we don't have entrepreneurs taking those risks as investors, then we're absolutely stuffed."

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