Total global fintech investment experienced a modest drop in Q3’17 following a significant rise in total investment during Q2’17. This decline is more reflective of the cyclical nature of the deal environment and is not expected to be an ongoing trend heading into Q4’17 and 2018. Despite a significant drop in the number of fintech deals globally, reflective of trends seen in the broader investment environment, investor interest in fintech remained very positive.
On the venture capital (VC) front, investment in fintech continued to rise steadily — marking the fourth straight quarter of investment growth. Meanwhile, the total number of fintech-related deals declined across every deal stage, with the decline in angel and seed deals most pronounced. This trend was not limited to fintech deals specifically, but rather reflects activity across the VC market.
Large deals propel fintech market globally
A significant number of large deals drove fintech investment in Q3’17. Companies in the United States accounted for more than half of Q3’17’s biggest deals, with Intacct ($850 million), CardConnect ($750 million), Xactly ($564 million), Merchants’ Choice Payments solutions ($470 million), Access Point Financial ($350M) and Service Finance Company ($304 million) among the top 10 global deals this quarter. Companies from four different jurisdictions rounded out the top deals, including Germany-based Concardis, UK-based Prodigy Finance, Canada-based TIO Networks, and China-based Dianrong.
Median deal size of early-stage deals grows
The median deal size of VC investments in fintech remained high relative to previous years. At the end of the third quarter, year-to-date median deal size for angel and seed stage deals was $1.4 million compared to $1 million in 2016, while the median deal size of early stage deals rose from $5.1 million to $5.5 million over the same timeframe. For later-stage deals, the median deal size held steady at $16 million.
The increase in investment for seed and angel deals suggests that investor knowledge and understanding related to fintech is growing, particularly around more mature areas of fintech such as payments and lending. As a result, investors are making bigger bets on fintech than they have historically. The number of deals involving companies looking to implement fintech proven in one jurisdiction in other markets has also increased. These types of investments are quite compelling to investors as they are considered to be somewhat lower risk compared to other potential investments.
Insurtech is on course for record year of VC investment Insurtech activity continued to rise this quarter. Both the total VC investment in insurtech and the number of insurtech VC deals are on pace to exceed 2016 results by the end of the year and potentially exceed previous highs. As of the end of Q3’17, VC investment in insurtech sat at $1.53 billion across 179 deals, compared to $1.79 billion across 203 deals in all of 2016.
Insurtech is still considered a relatively new phenomenon when compared with banking and other areas of financial services, but it is rapidly catching up. In Q2’17, UK-based insurtech startup Gryphon raised £180 million in the biggest insurtech deal of the region by far. During Q3’17, China’s first online insurer Zhong An held the World’s first major insurtech IPO in Hong Kong, raising $1.5 billion on a valuation of $10 billion. These financings are raising investor confidence worldwide in insurtech’s growth potential going forward.
Looking to the future, AI, the Internet of Things (IoT), robotics, and blockchain are all expected to be hot areas of insurtech investment. Corporate participation in fintech deals is also expected to rise in the insurtech space compared to other areas of financial services. This is because traditional VCs see the insurance ecosystem as complex and therefore like to include corporates with more understanding of the industry in their investments.
Blockchain evolves beyond finite test cases
Over the past several quarters, blockchain development has evolved rapidly, moving out of the experimental phase and becoming more focused on developing robust prototypes. There are also some indications that a number of companies are in the process of developing production blockchain systems. While there continues to be strong direct investment in blockchain, financial institutions are also investing heavily internally and are actively participating in blockchain syndicates and consortia.
Globally, the banking consortia R3 continues to be the largest of its kind. While R3 initially was quite varied in its development efforts, it has increasingly focused on specific areas of blockchain, including derivatives trading, payments, and trade settlements. R3’s evolution highlights both the maturation of R3 as a consortium and the growing recognition that blockchain development needs to be well-attuned in order to ensure ongoing development progress and, hopefully, rapid commercialization.
While less mature than its banking counterpart, B3i — the insurance industry’s largest blockchain syndicate — is growing rapidly, adding participants every quarter. While R3 and B3i may be the most prominent, there are also a growing number of smaller syndicates focused on blockchain solutions, many of which are focused on financial services. On a global level, numerous governments are supporting blockchain development and the creation of blockchain hubs. Singapore in particular is leading the way, but there is also interesting activity in the UAE and Kazakhstan. Other countries have also taken action on the blockchain front, with Spain recently introducing a new cross-industry blockchain consortia aimed at developing the country’s blockchain ecosystem.
The rising tide of ICOs
Recently, there has been an explosion in interest in Initial Coin Offerings (ICOs) as an alternative means of raising funding — particularly for blockchain-based companies. Funding raised through ICOs rose exponentially over a 4-month period earlier in 2017 — from $103 million in April to $574 million in July.1 With the rapid rise of ICOs, however, has come an increasing focus from regulators. In China, ICOs have been banned entirely, while regulators in other countries have increased their scrutiny over such activities. A number of jurisdictions are expected to put the brakes on ICOs until they are able to gather a greater understanding of the risks and opportunities and, therefore, provide a more coherent regulatory response. At the same time, a number of smaller jurisdictions like Malta, Mauritius, Switzerland, and Gibraltar have set their sights on becoming leaders in ICO-related innovation.
Mature fintechs become laser-focused on extending customer value
Historically, many fintech companies have been successful by focusing on improving a single area of the customer experience (e.g. payments, lending). Over the last few quarters, however, more mature fintechs, in addition to large e-commerce companies and technology players,have started to expand their service offerings into adjacent areas to extend their reach and provide more customer value. For example, in Q3’17, PayPal and Mastercard extended their partnership within Asia to increase PayPal’s point of sale presence, while also providing opportunities for customers and small businesses to cash out funds to a Mastercard debit card.
Retail banking continues to evolve
Despite the complexity of the retail banking sector, it has continued to evolve at a steady pace in recent quarters. Recently, a growing number of fintechs have applied for or obtained banking licenses, such as Square in the US and Klarna in Sweden. Over the past few quarters, there has also been growth in challenger bank offerings, particularly in Brazil and Malaysia. While there are over 100 challenger banks globally — to date, most have focused on niche products rather than the entire value chain of retail banking. While there are some efficient niche players, there will likely be some consolidation in the future in order to create better scale and enhance the ability to compete.
Some traditional banks are also expanding into digital banking, introducing nimble, standalone digital banks that operate independently and do not rely on their existing legacy systems. For example, Bank Leumi in Israel has introduced Pepper, Santander Group in Spain has launched Openbank, and Singapore DBS has introduced Digibank in India.
Regulators globally have also increased their focus on digital banking and on finding ways to encourage innovation and competition. For example, the Australian financial regulator is currently hosting consultations related to the introduction of a restricted license to make it easier for fintechs to do business.
Expanding number of fintech hubs
The growing breadth of fintech activities globally has led to the evolution of numerous distinct fintech hubs. While traditional hubs like the US, the UK, and Israel continue to dominate, other jurisdictions are working to become leaders in unique sub-sectors of fintech. For example, Japan is becoming a leader in fostering engagement around robotics process automation (RPA), while Taiwan is growing as a blockchain center, and Malaysia is defining itself as a hub for cybersecurity innovation.
Trends to watch for globally
Globally, fintech is expected to continue to grow and diversify over the next few quarters. Artificial intelligence, insurtech, regtech, and blockchain are poised to remain hot areas of finvestment. The rapidly approaching implementation deadline for PSD2 in Europe, and consideration for similar regimes in other markets, including Australia, is expected to put an increased focus on open banking.
Over time, the importance of Asia-based fintech hubs, such as Singapore’s insurtech innovation hub, is also expected to grow, particularly in the eyes of traditional corporates. As a result, it would not be surprising to see more companies from North America making investments in the region in order to gain more visibility and access to such innovations.