The global FinTech industry has enjoyed remarkable growth in 2017, in terms of deals and VC invested capital. Among the most notable events of the year have been the rapid expansion of ICOs worldwide, the inception of numerous new companies, mega-deals and the emergence of several highly valued unicorns.
According to the research portal CB Insights, the second quarter of 2017 saw the highest VC funds raised by FinTech companies. Assuming continuous growth, deals and funding could increase by 5% and 19% by the end of 2017, respectively. The FinTech sector is expected to continue expanding globally, with Europe and Asia reaching record deals and funding, while US funding grows steadily, amid a declining number of deals.
CEOs of numerous FinTech companies worldwide, engaging in various different activities believe that the future three-five years will bring unprecedented changes to the industry. As most users shift to mobile, blockchain becomes ever more ingrained in the digital transactions processes, cryptocurrencies use increases and AI data analytics improve the client experience, among other technological changes.
This was mostly attributed to 18 large deals worth more than $50m each, which cumulatively amounted to $3.8bn. The biggest transaction in the second quarter was a $1.4bn corporate minority investment to mobile internet unicorn One97 Communications, the parent of the Indian payments giant Paytm. The deal, backed by the Japanese investor SoftBank group, increased the company’s total funding to $2.8bn and valuation to $7bn, making the largest investment in a VC-backed FinTech company since the first quarter of 2012.
Among the other more notable and most active investors in the period there were 500 startups, NEA, Ribbit Capital, and Index Ventures. Corporate investors and their venture extensions continued investing in VC backed FinTech deals in the second quarter of 2017, increasing their participation rate to 31%, a 2 pp. rise in comparison to the second quarter of 2016.
One of the biggest drivers of FinTech growth in 2017 has been the emergence of new unicorns, which (together with the existing ones) form a group of 26 companies valued at $83.8bn. Within these, North America has 15 registered companies, Asia has 7, while Europe has just 4.
4 of the 5 new FinTech unicorns that emerged in the second quarter of 2017 are North American, while 1 is Asian. The start ups that reached valuations exceeding $1m are the North American invoice and payment company AvidXchange ($1.4bn), online investment platform Robinhood ($1.3bn), health insurance start up Clover Health ($1.2bn), cloud-based communication platform Symphony Communication Services ($1bn) and the Asian online lending site Tuandaiwang ($1.5bn at the time of its unicorn round)
The second quarter of 2017 marked a five quarter low in the number of deals, which dropped to 96. However, the emergence of the 4 new unicorns and 12 mega-rounds, exceeding $50m, led to a five quarter peak in funding of $1.9bn. Deals are expected to continue declining in North America and might drop by 15% for the whole 2017, while funding activity will continue growing by 11% in comparison to 2016.
European deals also declined in the second quarter of 2017, in comparison to the first quarter, but were nevertheless higher than the 2016 quarterly totals. The 56 deals conducted in the period raised $49m, of which 1/4 was attributable to a $12m strategic investment by Naspers’ PayU to Kreditech. If the current growth rate is maintained, deals in Europe are expected to set records and surpass the 2016 total by 40%, with funding exceeding $2bn.
Asia recorded a five quarter high in deals and funding in the second quarter of 2017, with 67 deals raising $2.7bn. The biggest contribution in the spike came from the funding of the unicorns One97 Communications and Tuandaiwang. If the growth in investment activity persists, the Asian FinTech deals and funding are also expected to hit record highs in 2017.
Trends according to CEOs
According to more than 30 CEOs from different positions of the global FinTech spectrum, including banking, data analytics and microfinance, the next 3-5 years will bring rapid transformations, technological and demographic shifts to the industry.
Banks and Financial Institutions
Banks and other financial institutions are expected to continue collaborating with FinTech start ups and acquire their skills and ideas. For example, due to FinTech disruption, clients will move online and visit branches less often, thus meaning that financial institutions will have to offer a high level of online and completely automated personalization.
In the same vein, incumbent companies will have to accept blockchain, in order to remain efficient and effective. Blockchain will influence the payment processes and redefine financial services for many causes. Innovative technologies like biometric identification and AI will additionally help simplify online and offline payments and shopping for the average consumers.
Bitcoin and cryptocurrency are expected to evolve and become an integral part of the online payments and transactions, although it is still unclear which technologies will exist in 5 years time.
Mobile shopping and payments have only recently evolved from mobile browsing, evidencing that retailers will have to optimize the mobile experience and the checkout process, by providing consumers faster and easier mobile options. Nevertheless, even though there are predictions that cash payments will decline by half in some countries, such as the UK, cash transfers will still continue to exist as a means of payment.
The payments industry has generally been aligned with the shift in mobile trends, with the exception of remittances and money transfers, which are expected to also become mobile in the next 5-10 years. Emerging and developing economies will be leading this mobile technology adoption, as additional 2 billion people in Africa and Asia will have smartphone-centric mobile wallets, while mobile transactions in the developed economies will reach their saturation point. Due to the expected increase in mobile users, money transfer companies will have to balance among user experience and security.
Investment and Wealth Management Advisory
In the future, investment advisory and financial planning will increasingly move online and provide convenience by offering complete user mobility from one service provider to another. The increased use of AI and data analytics will also improve the client experience, as the costs of creating client-centric solutions decline. In addition, commission-free investing is expected to emerge as a consequence of the higher proportion of financially literate people between the ages of 25 and 40 engaging in investing activities.
Financing and Lending
Instant financing will enable faster sending, lending and borrowing of funds, at lower costs. The speed of micro transfers and payouts will also increase in the next few years. More advanced data analytics, big data and AI will contribute to better credit scores. An example of advanced analytics would be a potential reformulation of their calculations using alternative data, such as monthly rent payments which are highly correlated with the debt repayment ability.
Exciting Times Ahead
The global FinTech sector is continuously evolving on the back of technologies such as blockchain, cryptocurrencies, payments infrastructure, mobile channels and data analytics, which have the capacity to dramatically change the way in which people use financial services. Considering the current activity in the global market and the CEOs predictions, the next 3-5 years will undoubtedly bring new start ups, eventually leading to value creation for all financial sector stakeholders.