Fintech Market Overview: Developments in North America
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Fintech Market Overview: Developments in North America
06 Oct 2016

Fintech Market Overview: Developments in North America

What’s happening in fintech? Ian Pollari, Global Co-Leader of Fintech at KMPG International and Partner at KPMG Australia, says: “We are seeing a continued diversification across many dimensions of fintech – the growth of different subsectors, the size of organizations participating, the geographic location of fintech companies attracting investment and increasing levels of activity from companies outside of the traditional finance services industry.”

So how have these trends played in recent figures, and what future developments should we watch out for?

Are VC investors getting the jitters?

2016 is seeing some major events that could disrupt investor confidence: the forthcoming US presidential election, the UK vote for Brexit, and worries about valuations along with challenging lending conditions. Will this reduce VC investment in fintech?

Although global funding issued to VC-backed fintechs reduced significantly in Q2’16 from $1.8bn to $1.3bn, the pace has now picked up again and investment is now on course to exceed 2015 levels. However, VC investors are concerned about the impact of current events. We may see reluctance to commit to investments in coming months, particularly in terms of mega-deals, as investors wait to see what develops.

Some subsectors within fintech have seen particular interest, such as InsurTech and blockchain distributed ledger technologies. These were highly popular funding options in Q2’16. Market confidence has been less buoyant in other sectors, partly due to news about problems at LendingClub and announcements of shutdowns, redundancies, and poor performance.

What are the main trends in fintech right now?

Before we discuss current movements in fintech VC funding, it’s worth pausing to consider the main strands of activity in this sector. The definition of fintech is continuing to evolve, particularly as companies reach out to the underbanked in areas such as Asia. 

There is, of course, lending tech, whether through peer-to-peer platforms or underwriting. Fintechs are deploying machine learning and algorithms to speed up credit checking in this area. Equity crowdfunding is also doing well, as fintechs build platforms for individuals to contribute to company projects and proposals.

Payments, billing and money transfer technologies are also big news.  Personal wealth management software is increasingly popular, as fintechs help people conduct their day-to-day finances and outgoings as well as assisting with longer-term asset management.

Solutions for large financial organizations such as banks, hedge funds and mutual funds are also doing well. Fintechs are providing tools for anything from alternative trading systems to financial modelling and analysis software.

Blockchain technology is maturing in the market, with many global banks and institutions focusing on proof-of-concept initiatives such as a $60m Circle Internet project looking at expansion into China.

InsurTech is also showing success. Companies like AIA are driving change; for example, AIA is using wearable tech to help people become healthier, with rewards based on the resulting data.

$1.3bn in 97 deals to VC-backed companies in Q2’16

In North America, deal activity reached a 5-quarter low in Q2’16. There were 130 deals in Q1’16, falling to 97 deals in Q2’16; Q2’16 was down 26% compared to Q2’15.

Despite this, corporate participation in North American fintech deals reached a quarterly high. Participation was up 23% between Q1 and Q2’16, with corporates now being involved in 30% of all fintech deals. California took the lead in Q2’16 fintech funding, beating contender New York by 200% that quarter.

Early stage deals in North America reached a 5-quarter high in Q2’16, with median early-stage deals reaching $4.6m that quarter, a 53% increase over Q1’16.

VC funding was hugely popular in 2015, with a plethora of emerging business models, revenue streams, products and services proving exciting for VC investors. Investment from alternative lenders also helped drive up private company valuations.

This year, investors have been more cautious, opting for more established companies with proven technologies and business models. This could lead to a market shakeout, particularly in the lending space, as less stable online lenders fall by the wayside.

Top deals in Q2’16 VC investment activity

This quarter has seen some remarkable deals. The top deals were all series C: Affirm for $100m, Mobikwik for $50m and Remitly for $38.5m. The top countries for investment were the United States with 26 deals worth $251m; Germany with 5 deals worth $64.9m and the United Kingdom with 3 deals worth $42.4m.

Insurance and fintech: friends or foes?

There is a mixed relationship between insurance and fintech, with some insurance companies utilising fintechs to build solutions for customer service and delivering better value.

In other areas, however, InsurTechs are seeking to compete with insurance companies. Small, nimble fintechs can help deliver tailored solutions while traditional companies struggle with issues like low consumer trust, IT legacy problems, low interest rates and reducing profitability.

Combined with this, insurance customers also have greater expectations of more personalized, tailored service. In this environment, InsurTech is proving attractive for VC investors and corporates.

Martin Blake, Subject Matter Expert in InsurTech at KPMG Australia, has noted that insurers have data challenges: “Most insurers struggle to leverage existing data to deliver deeper insights. Fintech companies that have behavioral analytics capabilities can help these insurers gain a deeper understanding of behavioural trend and insights into individuals, allowing for the development and creation of much more customized solutions or fast-tracking customer service.”

 

 

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