2018 will mark 10 years since “Fintech”, the buzz term for financial technology start-ups, entered the lexicon, threatening to totally upend banking as we know it.
It hasn’t yet. But will it?
Total fintech Investments 2008-17 are $53.9bn which includes Venture Capital (VCs), private equity and crowd funding and represents 6.7% of total start-up funding.
The Davos “Cluster of Innovation Model” provides a helpful overview of fintech, breaking the market into 11 major sectors and then 33 market segments.
The Cluster model divided by the total investments equates to $4.99bn per sector and $1.63bn per market segment over 9 years.
The key question is whether this level of investment is sufficient for major disruption of banking. Uber, for example, has raised $11.5bn in funding and debt in 18 funding rounds since March 2009 and has success in a much smaller segment than financial services. Uber has raised the equivalent of 21% of total Fintech funding.
The total Fintech investments by VCs from 2008 -17 are $41.3bn which is only 7.4% of all VC investments – not a dominant category and well behind eCommerce.
THE MAJOR START-UP INVESTMENT PHASES
A review the major start-up phases – which includes Angel Investing, VC start-up investing, ‘Unicorn’ phase and Exit through IPO or M&A indicates likely results.
The major Fintech Angel investing and VC Start-up investment categories are:
- Peer to Peer Lending: lending to consumers using online, mobile and social media that matches lenders directly with borrowers – total invested $6.24bn or 15%;
- SME and Business Lending – mobile, online and social media lending services targeted at small to medium business – total invested $2.83bn or 7%;
- Student Loans – direct lending to tertiary students using mobile, online and social media channels – total invested $1.93bn or 4.6%;
- Point Of Sale/ Online Payments – tech services targeting online payments, point of sale payments and related services – total invested $2.89bn or 7%
- cyber or digital asset designed to work as a currency or a value exchange – total invested $2.85bn or 7%;
- Digital Banking – retail banking using social media, mobile and web based services often supported by tools and rewards e.g. budget tools – total invested $3.5bn or 8.5%
- Local and International Remittances– remittances services for local person to person payments and international transfers using social media, mobile and the web – total invested $1.67bn or 4%
- Wealth/Investment and related Tech – investment and pension products using mobile, social media and the web – total invested $3.4bn or 8%, and
- Insurances and Tech – insurance and tech services using web, mobile and social media – total invested $2.24bn or 5.4%.
It is significant that these nine segments total 67% of VC Fintech investment. It is likely therefore that any major disruptor will emerge from these segments. The leading segment is P to P Lending with $6.24bn.
‘Unicorns’ are start-up companies with valuations of $1bn dollars or more. CB Insights index has 217 start-ups rated as Unicorns with valuations of $752bn. Uber is the top rated Unicorn at $68bn.
Fintech ‘Unicorn” companies are considered the most successful and the nearest to an exit. There are 24 Fintech Unicorns with valuations of $75.95bn, 10% of the total. Of those, 20 of the Unicorns are in US and China with one in India, Netherlands, Sweden and the UK.
FINTECH EXITS THROUGH IPOs or M&A
Fintech IPOs formed the smallest part of the Fintech M&A sector. McLean Roche Consulting review of M&As in 2014-17 shows 87% of transactions are M&A acquisitions by other, often larger players with 8% unable to IPO or find a buyer – leaving 5% which IPO.
The peak years for IPOs was 2010 with 18, 2014 with 17 and 2015 with 12 while in 2016-7 year to date there have only been 6 with a total of $1bn billion. This raises the question was 2010-2015 the high water mark for Fintech IPOs?
True Disruption or Hype?
Fintech’s first decade is high on hype and spin but very low on delivering its ‘vision’ of a total disruption. There is no equivalent of Facebook, Google, Skype or Apple. That is not to say fintech companies won’t be successful and build current ideas into growth oriented start-ups.
The sector however faces some serious head winds which will challenge the valuations which are currently 50-60% higher than other investment categories and will require faster deliver and increased performance. This is a significant challenge for fintechs given the barriers to building scale quickly in financial services.
The modest level of investment to date at $53.9bn is not enough to create the next financial service giant – Facebook founded in 2004 had 11 founding rounds with $2.3bn invested prior to its 2012 IPO. The largest fintech sector, P2P lending, has only S6.2bn in total investment over 9 years, with a market cap today of $3.6bn.
The P2P example is salient. Launched when money was cheap, the sector has realised that it is not quite that easy to build a billion-dollar business. The incumbent banks are protected by considerable regulation, have vast resources and will not fall over easily: this is not the taxi industry.
Performance to date is subpar – with major scandals including $7.6bn fraud by Ezubao in China, Lending Club and OnDecks stock being trashed due to doubtful lending practices while Prosper lent $48,000 unsecured to the two San Bernardino terrorists months before the attack.
These incidents feed the narrative that start-up lenders do very little that is new or innovative other than offering speed while falling back on existing industry tactics once they have some scale.
The other segments include digital banks, factoring companies, point of sale payments, online services and currency exchanges are now a dime a dozen and lack scale. Most of the ideas are laser focused on a small segment and will not build size quickly.
The enthusiastic start-ups key challenge is the realisation that the world is changing and they have to modify their dreams of world domination and accept an M&A outcome and work for a bank.
This in many cases won’t work as the cultures are vastly different between the young freewheeling start-ups and banks with their size, structure, politics, regulation and conservative approach to risk and technology.
Previous aggressive, trend oriented acquisitions by banks including monoline mortgage and credit card companies in the 90s and mobile wallet companies in early 2000s all ended with faded dreams for all parties. Fintech in its current state could well repeat this experience.
Grant Halverson is CEO at McLean Roche Consulting