The evolution of the mobile phone from a simple phone that could just do phone calls and send text messages; it has become everyone's virtual personal computer. This has created the merger of the financial services places with the technology sector – a sector that is known as “Fintech”. As a result, this technological evolution has increased the expectations from consumers, who now want all their financial solutions to be digital. There have been a plethora of entrepreneurs who have identified such niche’s and developed financial technology (Fintech) solutions for consumers, SME’s, and multinationals. This innovation, combined with a low and in some cases negative interest rate environment has created a need for firms to need to look at ways to boost ROI's through cutting costs and offering differentiated and more digital services to stay competitive towards a very demanding consumer market. This sector is known for having created multiple unicorns. Some include Stripe (USD 35 B valuation), Ripple (USD 10 B valuation), Coinbase (USD 8.1 B valuation), Robinhood (USD 8.3 B valuation), Chime (USD 6.0 B valuation) and Revolut (USD 5.5 B valuation) and many more.
Within the Fintech space, there are a few trends that we see continuing in the coming years. We have highlighted some of them below:
- Private Markets Marketplaces: “Companies are staying private for longer and getting funded longer,” says Jim Cooney, head of equity capital markets for the Americas at BoAML. In 2013, 25% of the equity raised from new shares came from the private markets, while today‘s figure stands at 48 percent — a trajectory set to continue, Mr. Cooney says. (Henderson & Kruppa, 2019) As a result, the need for liquidity solutions in the market for retail but also institutional investors is a critical need that is being addressed. The most recent largest deals we have seen in this space is the recent merger of SharesPost (Neventa’s portfolio company) with Forge Global, which is set to create the largest secondaries marketplace, will face competition by Carta (who just raised USD 180 M at a 3.1 B valuation), who recently announced that it is also entering this space as if this summer (Kruppa, 2020), and Nasdaq Private Markets. (Pitchbook, Q1 2020)
- Retail Finance: Consumers have been wanting to control their personal finances from their mobile phones without having to see specialists. This need was answered through the launch of mobile-only banks across the world, with players such as Chime, and Revolut, Monzo, N26, etc.… This trend of companies that have emerged with a mobile-first banking model have been dubbed as "neo-banks", with their 0 fees models. Many have seen their valuations explode to unicorn status. The PSD2 legislation has furthermore allowed 3rd part solutions to integrate bank information feeds and create banking aggregators where one app will let you have a full view of your account details). Two aggregators that have gained a lot of traction are NerdWallet and CreditKarma. Finally, in the retail finance space, we have the personal credit space growing, with companies such as Klarna, Affirm, Upgrade, and Behalf. This space’s recent largest deals have been Chime’s USD 700 M Series E, Revolut’s USD 500 M Series D, N26’s USD 570 M Series D2, Klarna’s USD 200 M Late Stage raise, Affirm’s USD 300 M Series F and Varo’s USD 241 M Series D. (Pitchbook, Q1 2020)
- Lending: Requirements for short term loans have exponentially increased in demand, especially for small and medium-sized businesses, and we see an emergence in companies in this space as well as funding for it. There are more non-banking players entering the market. We have witnessed disrupting models such as revenue-based financings, making the whole borrowing process easier. While in some ways this is a mature industry, there is still quite a bit of investor appetite in this space, and we may see a consolidation but also a new set of more disruptive players as well. The most recent largest deals we have seen in this space are SoFi’s USD 500 M Series H, Fundbox’s the USD 326 M Series C, ClearBanc’s USD 300 M Series B, EasyKnock’s USD 215 M Series A, and BetterMortgage’s the USD 160 M. (Pitchbook, Q1 2020)
- Payments: While there has been a short-term slowdown in spending due to COVID-19 and the subsequent millions of laid-off workers, we have still seen payments online grow exponentially (On May 1st, PayPal had the single most transactions on PayPal, beating Black Friday and Cyber Monday 2019). The long-term adoption of contactless payments and eCommerce (with penetration increasing globally) confirms the case for the payment space. We also see more developments and innovation happening in the B2B payments space, with players such as Rapyd (recently became a unicorn), who are building platforms to manage receivables and payables. The most recent largest deals we have seen in this space are Toast’s USD 400 M Series F, Avidxchange’s USD 388 M Series F, Marqeta’s 150 M Series F and Stripe’s USD 250 M Series G. (Pitchbook, Q1 2020)
- WealthTech: The rise of unicorns such as Robinhood has set the trend in the increase of consumer’s around the world to want to manage their wealth on mobile with minimal transaction costs, be it for day trading, long term investments or even retirement planning. Europe has seen the rise of two competitors Freetrade (USD 10 M Series B), Bux (USD 13 M Series D) in Europe, but also the entry of the large neo-bank Revolut (USD 500 M Series D) into this space. The most recent largest deals we have seen in this space are Robinhood USD 430 M Series F, Revolut as shown above, Aspiration’s USD 135 M Series C, Figure’s USD 103 M Series C, Wealthsimple’s USD 75 M Series C and PeerStreet’s USD 60 M Series C. (Pitchbook, Q1 2020)
- InsurTech: The next few years will lead to the rapid digitalization of the insurance industry, where we will see most of the brokerage activity be automated through AI Chatbots. Furthermore, digital transformation will also massively impact the insurance supply chain. Some of the disruptors in the space are the idea of pay as you go car insurance with MetroMile (USD 90 M Series E) and Tractable (USD 25 M Series C), which automates the assessment of property damages through images of damaged vehicles/property. The most recent largest deals we have seen in this space are Bright health 635 M Series D, Root Insurance 250 M Series E, Lemonade 300 M Series D, Next Insurance 250 M Series C and WeFox 235 M Series B. Oscar Health’s USD 375 M Series E. (Pitchbook, Q1 2020)
- Fintech IT: While we see a lot of the banking services doing well, it is also essential to mention the companies that are providing the infrastructure allowing the neo-banks and other financial services solutions to operate successfully and efficiently. We have seen a lot of growth in the cloud space, enterprise architecture, and within platforms and APIs. Companies such as MX and nCinio are offering cloud-based banking platforms that can be easily integrated into their existing offerings. On the core banking side, we have also seen a new model emerge, different from the traditional BaaS (Banking as a Service) where traditional banks provide the technology, compliance, and security for neo banks and nonbanks. This new model has allowed new players to set up a platform that allows nonbanks to connect to banks, without too much need for including internal product development teams. Two companies that are taking the lead in this space are SynapseFI and Deposit Solutions. The largest most recent deals we have seen in this space are Tink’s USD 100 M the Series E, MX’s USD 100 M Series B, Thought Machine’s 83 M Series D, nCinio’s USD 80 M Series E and Galileo‘s USD 77 M Series A. (Pitchbook, Q1 2020)
We believe we will see far more innovation in the Fintech space over the years to come, especially with the advance and adoption of artificial intelligence, machine learning, Robo-advisors, blockchain, and to some extent crypto-currency. The most significant trend that will lead us throughout the 21st century will be taking payments and transactions from mobile into the next era of innovations, where we will see a combination of Fintech with Industry 4.0 (e.g., Internet of things, sensors, etc…).
The impressive growth in the fintech space has been led by the excellent execution of many of these players turning a concept into a want, and then into a need. This massive disruption in the financial services industry has led to all the traditional players to either adapt to these emerging trends or to give up on long term growth (and that is why we have seen so much investment from the corporate venture arms of financial institutions playing a very active role globally in investing in the emerging solutions and platforms).
The private markets industry is growing exponentially, and the time that companies are staying private is also increasing. The IPO phenomenon where emerging companies are listed and can capture massive upside as they continue their growth will be sharply reduced – and private companies will only enter public markets at the point where they have passed the growth stage and have reached a mature phase, limiting the long term potential upside. To capture this important upside, it will be essential for investors to have an alternative investment allocation into their portfolio, especially in the digital technology space.
References
Henderson, R., & Kruppa, M. (2019, October 31). The powerful forces are reshaping Amerca's capital markets. Retrieved from Financial Times: https://www.ft.com/content/50dea950-f5b4-11e9-a79c-bc9acae3b654
Kruppa, M. (2020, May 11). Carta plans a private share trading platform to rival Nasdaq. Retrieved from Financial Times: https://www.ft.com/content/d52b0487-b13c-4bae-bf27-770518ff083d
Pitchbook. (Q1 2020). Emerging Tech Research - Fintech Deepdive. Pitchbook.
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