Tech companies have received an influx of capital over the last few years. According to the State of Venture Capital report, 2018 was a record year for venture capital, with $254 billion in investments worldwide into nearly 18,000 startups by venture capital funds. This is a significant rise of 46% over the total of 2017. The numbers for 2019 aren’t yet fully finalized, but preliminary reports suggest an increase in funding during the first quarter of the year and an upswing in Q3. The same is true across all industries and is likely to be the case in the fintech industry, which is the most significant sector within the growth sector. In actuality, the world’s fintech industry was valued at $127.66 billion in 2018, With a projected annual increase of about 25 percent through 2022. This will amount to $309.98 billion.
In the more significant VC sector, there’s a general trend within the fintech industry towards maturity, which is reflected in the larger size of funds (getting closer in size and behavior to their counterparts in private equity) investing in the later phases of a business’s life cycle as is evident in the section on funding statistics. This, along with the decline in seed-stage companies’ funding, indicates the general development and consolidation of the industry.
The market and fintech sector are maturing and maturing; it’s time to evaluate which companies will be around for the long haul and which ones can be profitable. There will likely be consolidation and maybe some notable failures.
Three factors contribute to the development of the fintech industry:
The cutting-edge technologies that contributed to the growth of innovation in this field (e.g., AI and cybersecurity) are becoming more advanced.
Much of the money was invested in the initial generation of companies trying to build and capitalize on the devastation caused by the financial crisis 2008. They are now at an endpoint in their lives and, as a result, are getting their houses to pay back their investors.
The macroeconomic environment, specifically for the UK (one of the leading fintech markets) and across Europe, has deteriorated and slowed funding to young and emerging firms.
Additionally, when it comes to the geography of the world, more and more mega-deals are taking place in developing nations with a vast unbanked and underbanked population, creating an ideal environment for rapid expansion. The massive worth in the case of Ant Financial (~$150 billion at the end of June 2019) perfectly illustrates the different trends, so we’ll only review the issue. It’s also an interesting analysis of the best way to create a top financial services company.
Categorization: What Falls Under Fintech?
Fintech technology is defined as any technology that aids firms in financial services in managing or providing their services and products or assists people or businesses in managing their finances. Under this definition, we also include technology for regulatory purposes. However, we do not include cryptocurrency specifically within the financial sector (the latter is needed to prevent extreme volatility). Other reports might employ an alternative breakdown and have slightly different figures for totals.
The major players in the world that deal in financial services include (listed by importance and magnitude):
Government entities are a broad category of entities, ranging from central banks, regulators, sovereign wealth funds, and all authorities that grant licenses and directly influence the financial industry.
Traditional financial services companies are becoming involved as potential strategic acquirers and as promoters of technological innovation. For example, Citibank, the US bulge bracket bank, is significantly and is becoming increasingly engaged in the field. It is involved in various initiatives, including an accelerator and external acquisitions and a venture capital investment team that invests in the bank’s own money (on its balance sheet, no less).
Professional investors can be classified based on the size (small or large funds) and stage (seed, late venture private equity. ) and, finally, the sources of funds like pension funds and family offices, strategic investors, and so on.
Innovative, disruptive companies that operate in various industries, which we’ll discuss in the following sections. Most of the time, these companies started through “unbundling” one of the services offered by an incumbent.
Finance and banking have always been tightly tied to government and, therefore, are challenging sectors to get into. Fintech entrepreneur Kathryn Petralia summed up the intricate relationship between bank and state in this way: “While technology and market forces are at the heart of the constant disruption, they are not the sole or primary driver behind the outcomes. Banks are ultimately about money, and money is the subject of public authority. That’s why banks have been regulated for centuries even when they were not direct creations of the government.”
As the industry matures and matures, it moves away from consumer-focused P2P (peer-to-peer) options towards infrastructure, capital-intensive businesses, and new technology. But, total disruption is far off as the fintech industry is just gnawing at the feet of the big banks.
Funding Statistics: Maturing Sector Still Has High Growth
It was an incredible year in the fintech industry (and tech companies generally), and the amount of money pumped into fintech more than doubled compared to the prior year. The trend has shifted in 2019 slightly, with a slight normalization of volume but exhibiting an impressive growth rate in the past.
Emerging Categories for Companies
Within this segment, we’ll discuss the taxonomy of new categories, providing insight and examples for each type and emerging trends in fintech.
Open/challenger banking. The regulatory conditions and changing consumer behavior encourage financial institutions to join open banking and challenger banks. Many fintech players on the market are creating platforms that will let financial institutions connect to the larger API ecosystem, specifically within the European Union. This is essentially, due to the radical new regulations implemented in the EU and PSD2, or the Payments Services Directive, PSD2, and within the UK. The UK is an interesting case study. The reduction in the requirements for capital approval for a banking license through the FCA (Financial Conduct Authority) led to an explosion of banks opening and receiving approvals following the year 2011 (while no new bank was granted one in the past 100 years before). TrueLayer is a fantastic achievement in this area. The company has recently received 35 million dollars in financing from highly prestigious investors, including Temasek, the sovereign wealth fund run by the Government of Singapore, a popular and respected player in fintech. Temasek is also among the top shareholders of Ant Financial, which is the subject of our small investigation.