Question

What do the historical M&A data tell us about the fintech landscape? Which other alternatives could this bank focus on to create value in the fintech space?

Answer 1

What do the historical M&A data tell us about the Fintech landscape?

According to an analysis by Deloitte “Fintech by the numbers Incumbents, startups, and investors adapt to Fintech” an interest in “Fintech” did not start to grow until early in 2015.1 Even though “Fintechs” in marketplace lending and payments have been around for 15-20 years, only in the past five-to-seven years have many traditional financial services companies dramatically ramped up their own investments and transformation initiatives to keep pace with the new breed of technology disruptors dominating most conversations about the industry’s future.

The data trends and analyses of where Fintech development is heading the following major points came up

1. New Startups are on decline

According to Venture Scanner data startup growth is shown to be steady yet rather modest from 2008 through 2010. Which is evident from the data of Company formation. However, in the following two years the total number of companies entering the market doubled. After two more years of much slower overall expansion it turned into negative growth in 2015, and sharply declined the following year with a 62 percent drop in startup activity. There has been an even more dramatic dive taking place through the first three quarters of 2017. (Figure 1)

2.

1. Fintech investment is on the rise

Analyzing the data by sector and solution the number of formations versus the dollar amount of investments made since 2008 it shows that while new Fintech company formations may be on a downturn in some areas over the past two years, the amount of money being raised in three of the four industry sectors remains robust right through the current year.Despite the drop in Fintech startups among some categories, banking and capital markets is on track to at least come close to matching its 2016 investments in dollar terms, with the “legacy” categories of payments and deposits and lending still drawing significant amounts of capital. Meanwhile, investment management and real estate have already topped last year’s figures, with a full quarter of activity in 2017. (Figure 4)

3. New funding sources suggest consolidation

While venture capital remains the primary source of funding for Fintech startups by far, trends suggest an increasing level of private equity and debt financing. In addition, the data shows a lot more activity has been coming from later funding rounds. IPOs and acquisitions are also on the rise.

This is typically an important indicator of a maturing market. Clearly, with early stage funding (including seed funding), investors are often making their decisions based on the company founder’s reputation and the potential of the actual Fintech idea. As companies grow and move to later-stage funding rounds, expectations ramp up, and these companies are often evaluated no differently than public companies.6 They need to demonstrate a more robust and resilient business plan and be able to point to real-world market results.

The fact that more money is being devoted to later-stage investments, while the total number of startups launched each year is in decline, seems to indicate an inevitable shakeout is underway, with those Fintechs that have been able to get their solutions off the drawing board attracting additional funds to take their companies to the next level. (Figure 5)

4.

1. Startup activity and investor interest varies by geography

Just as all financial services industry sectors are not alike in terms of startup activity and funding levels, geography plays a role too. There are some countries where Fintechs across the board find a friendly environment for establishment and investment. This is largely due to a combination of an educated and entrepreneurial workforce, government incentives around innovation, and large pools of capital looking for investment returns. The United States and the United Kingdom are examples of Fintech-friendly countries.

The United States far outstrips any other country in terms of the total number of Fintechs in operation and total investments, across several categories. In united states there were 264 Fintech companies with $7.7 billion in funding whereas in China there were 7 Fintech companies with $6.92 billion in funding

Which other alternatives could this bank focus on to create value in the Fintech space?

A recent World Economic Forum/Deloitte report finds that Fintechs have driven a more rapid pace of technology innovation while changing expectations for what a quality customer experience can be. However, they have not meaningfully disintermediated existing providers, nor have they overturned longstanding financial services infrastructures, such as exchanges or payment networks. Which could be a huge opportunity.

These developments suggest that incumbents should seek to collaborate with Fintechs—if they’re not doing so already—to gain operational efficiencies, develop new products, and improve customer engagement, while also keeping an eye on additional potential disruptions and innovative solutions that will likely emerge.
Figure 1: Fintech companies founded by year, 2008-2017 YTD 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 76 18 40 103 19 54 54 127 25 61 69 186 39 67 83 281 54 91 150 249 59 138 182 237 57 142 232 165 26 155 158 64 14 130 48 102 23 6 0 100 300 600 700 INVESTMENT BANKING& CAPITAL MARKETS 用 INSURANCE REAL ESTATE Source: Venture Scanner data De itte Center for Financia Ser cesanals