Investing in fintech remains popular, with much investment activity and an overall higher valuation of organisations within the field. Who are then the investors in fintech, what do they invest in and what is their investment rationale?
Fintech is more popular than ever, with new fintech startups born every day. Investments in fintech are following the same trends. In 2017, the annual deal value amounts to more than USD 30 billion globally, with close to 1.500 deals or about 4 deals per day (Source: KPMG Pulse of Fintech Q4’17). While this is lower than the peak levels of 2015, a year with various large deals in Asia, global investments in fintech grew 3x larger since 2012.
Also the valuations of fintech companies are reaching record heights. For example, the UK mobile-only bank Revolut that launched only 3 years ago in July 2015, recently raised USD 250mln (on 26th April ‘18), bringing the valuation to USD 1.7bln. PayPal acquired iZettle, the successful Swedish ePOS provider, for a total of USD 2.2bln, more than double of what it was looking to raise in an IPO (on 17th June‘18). The Amsterdam-based global payment platform Adyen went public with an IPO (on 12th June ‘18), which valued the company at USD 8.3bln (EUR 7.3bln). But the record goes to China’s Ant Financial, parent of the online payment platform Alipay, which raised USD 10 bln (on 28th May ’18) with a valuation of USD 150 bln, among the largest valued companies worldwide.
Following Adyen’s IPO and the fundraising of Revolut, there are now a total of 34 fintech unicorns valued over USD 1 bln, with a total combined value of around USD 270 bln (Fintechnews Switzerlands, 22nd June ‘18). This list includes other newcomers as capital markets tech startup Tradeshift (valuation of USD 1.0 bln), and blockchain company Circle (valuation of USD 3 bln). Conversely some companies like iZettle left the list through M&A.
While these examples are only the top of pyramid, we see the fintech sector maturing across the board. Overall, valuations are on average higher and the number of deals is close to the levels of 2015. There is a large number of fintech companies that can raise money with a high valuation. In addition, there are more later stage funding rounds (KPMG Pulse of Fintech Q4’17).
There are some key trends to observe in the type of fintech investments. First of all, there is an increased focus on B2B capabilities. Until a few years ago, companies that offered an innovative customer products (e.g. payments, lending) and a better user experience (e.g. mobile-only neobanks) attracted most attention. Nowadays, there is a larger focus on the underlying capabilities that enable innovation (e.g. IT, infrastructure, security, compliance etc.).
Second, there is a continued rise of new technologies. Cryptocurrency and blockchain remain a very popular investment category, and some initiatives are slowly showing some results. In addition, the use of big data through AI drives the creation of new business models and services (e.g. chatbots, robot-advisors, automatic processing and security).
Third, many markets around the world are moving towards an open banking infrastructure and ecosystem. In Europe, PSD2 is the big driver that forces banks to open up to regulated third-parties, to provide access to customer data of payment accounts. Outside Europe, many countries such as Australia, Canada, Hong Kong, Singapore, South Korea and India, amongst others, are all working towards open banking. Open banking enables a large variety of business models that attracts new funding as well.
In addition to trends in the type of fintech investments, there are also some trends to observe in the investor landscape. The investment space is typically dominated by VC’s and PE’s (accounting for 66% of deals per 2017), however their share is slowly declining. Conversely, there is a larger share of M&A with fintech companies consolidating amongst each other (e.g. PayPal & iZettle, Funding Circle & Zencap), amounting to over 20% of the deals and close to half of the deal value.
And most importantly, in recent years there has been a sharp rise of CVC’s (Corporate Venture Capital, of financial institutions) in the investment landscape; since 2010 CVC’s almost doubled its share of deals to 19% in 2017, and increased their invested capital over 20x. Nowadays, most large banks are actively investing in fintech start-ups (in addition to in-house initiatives). They invest both in frond-end customer solutions and customer experience, as well as underlying capabilities, such as the underlying IT platforms, new technologies and infrastructure. There are some interesting differences worldwide; while banks in Europe and North America rather invest in infrastructure and capabilities, Asian banks are investing more in customer solutions (i.e. payments, lending).
With so much activity in the fintech investments space, ever higher valuations, and many types of investors. why then is fintech such a popular investment category?
For financial buyers (VC’s, PE’S) fintech offers potentially great returns. At one side, the fintech market is still growing with double-digits per year, driven by enhanced financial inclusion and ongoing digitisation from cash to cards and e-money. In addition, many fintech segments proved to have quite robust revenues (i.e. payment processing performed quite well during the recession).
CVC’s (financial institutions) at the other side, rather take a strategic approach to investing in fintech. The key investment rationale is to drive internal innovation and insource new capabilities. Financial returns are often merely a knock-off criteria (i.e. minimum investment returns of 12% must be met).
This brings rather positive outlooks to fintech companies that are looking to raise money. However, the success doesn’t come by itself. Management is key factor in the success of a company and delivery of its promises. And investors are typically very much involved with their investments.