07 Jun 2016
" …there’s no clear road map from a brilliant idea to a genuinely profitable destination."
Andrew Cornell, Managing editor, BlueNotes
According to KPMG’s latest The Pulse of Fintech report, the March quarter saw funding to the fintech sector rebound with total investment in fintech companies hitting US$5.7 billion.
Globally, Venture Capital-backed fintech companies drew $US4.9 billion in funding, rising from just $US1.9 billion in the fourth quarter of 2015.
The report identified larger deals, concentrated in Asia, played a major role in the rebound with 13 $US50 million+ rounds to VC-backed fintech companies, a slight rise from 10 such deals in the previous quarter.
So the fintech train is back on the rails?
Not so fast, according to some in the VC industry. “If I hear ' We are the Uber of banking!’ or ‘we will deliver banking the Kodak moment!’ one more time I think I will scream,” one VC global road warrior told me last week in the midst of another trip.
“And what do 99 per cent of these 'entrepreneurs have? Usually an app or an unscaleable idea - go figure, caught up in the Hype of Fintech.”
He may of course have faced one too many elevator pitches but his more substantive point is the providers of capital – be they VC or other investors – are not so much interested in a space or a global story as they are in investment opportunities.
Albeit high risk, high return ones. It doesn’t matter whether it’s fintech, agtech, regtech, the sharing economy or accounting platforms.
In the universe VC, and high risk capital more generally, is looking at ‘fintech’ is actually a rather small galaxy.
“In reality VCs invest in companies regardless of whether they are Fintech or not - the end of June 30th VC and crowd funding numbers will be more relevant I think,” the investor says.
He points to this chart from the World Economic Forum:
The other interesting point is the spaces where deals are being done as opposed to being pitched. Maybe someone still has the “Uber” of banking somewhere but by and large, and not unexpectedly, the deals being done involve incumbents absorbing promising, even radical, but still incremental plays.
Consider two recent ones.
In the United Kingdom, four major banks - Bank of Scotland, Barclays, Halifax and Lloyds Bank – will use VocaLink’s ‘Pay-by-Bank’ app which uses the bank’s own security methods to verify the user and allows money to move instantly from a customer account to a merchant account through the UK’s real-time payments.
International payments giant Visa meanwhile has made a range of acquisitions of start-ups and fintechs and has now developed its own Digital Commerce App to allow its partner financial institutions to customise and deliver their own branded mobile app for their customers.
Visa says it’s not a digital wallet but a digital commerce platform that enables a variety of features including peer-to-peer payments, loyalty and rewards integration and digital issuance and re-issuance capabilities.
The KPMG report, which covers all equity rounds to VC-backed fintech companies, picked up some interesting regional trends.
In North America, the number of deals is on pace for a record with 128 deals in the first quarter worth $US1.8 billion. While the run rate points to a record 500 or more deals for the year, funding will be down 10 per cent.
“Corporates participate in over one of every four North American deals: Corporate participation in deals to North American fintech companies rose for the second straight quarter and hit a five quarter high at 26 per cent,” KPMG said.
“Seed-stage fintech deal share falls for second straight quarter: In Q1 2016, seed activity took 28 per cent of all fintech deals in North America, a five-quarter low. VC-backed Series B fintech deal share fell to 14 per cent in Q1 2016 from 21 per cent in Q4 2015.”
“Late-stage deal sizes drop to five-quarter low: A lack of megarounds helped push the median late-stage fintech deal size in North America to a five-quarter low of $US19.5 million. Median late-stage deal size in Q1 2016 was 68 per cent smaller than Q3 2015’s high.”
It’s literally the other side of the planet in Asian fintech where China is playing a larger and larger role.
In Asia, first quarter funding jumped to $US2.6 billion from $US0.5 billion on the back of megarounds to JD Finance and Lu.com of more than $US1 billion each. Asia is also matching its deal number run rate of last year. Seed deal share rose from 15 per cent to 39 per cent while Series A (later stage) dropped to a five-quarter low.
Interestingly, in Asia the corporate participation rate is slowing.
“Corporate participation in Asian VC-backed fintech deals fell to 31 per cent in Q1 2016, a five-quarter low. Still, corporate participation in Asia remained higher than in both Europe and North America and remained above 30 per cent for the fifth straight quarter,” KPMG said.
The over-arching point though is fintech is not huge in the overall VC space. That’s not to say, as Stuart Stoyan, founder of marketplace lender MoneyPlace, has said that the world’s first trillion dollar start-up won’t be a fintech.
In financial services, VC is also looking at more traditional financial services plays, including digital banks. (BlueNotes will have a feature on the new generation of digital banks in coming weeks.)
There’s a lot of interest. There’s already successful banks such as ING Direct. Customers like them.
But the business challenges are the same: “I am doing some work for a client on digital banks,” another VC adviser I speak with told me.
“We have yet to find one that has over 500,000 customers and none are profitable. I think Simple which was sold to BBVA for a very modest price is unscalable, Moven has no scale and is not getting any traction.”
Like so much fintech, it’s not that this road is a blind alley, rather a further reminder there’s no clear road map from a brilliant idea to a genuinely profitable destination.
Andrew Cornell is managing editor at BlueNotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
07 Jun 2016
30 May 2016
24 May 2016