LONGREAD: Why would you invest in fintech?

It’s now nine years since ‘fintech’, the buzz term for financial technology start-ups, entered the lexicon and threatened to upend banking as we know it. It hasn’t yet. But will it?

As it stands today, fintech to date is not innovative or transformative enough and investment dollars are not sufficient to build a world-leading financial-services breakthrough.

"Fintech to date are not innovative or transformative enough and investment dollars are not sufficient to build a world-leading financial-services breakthrough."
Grant Halverson, Former CEO, McLean Roche Consulting

But let’s take this step by step.

Total Fintech investment from 2009 to 2015 totalled $US43.9 Billion, including Venture Capital(VCs) and other investors such as private equity and crowd funding.

What’s the promise? Consider this statement from a global consulting firm, typical of the language surrounding the category:

"The language is of enormous, disruptive promise. Typically the success of Uber or AirBnB is cited as examples of what will happen to banks, finance companies, wealth management and insurance companies.

The vision is of the total disruption and decimation of current ‘legacy’ players using new ideas and new technology which sweeps them aside."


So let’s analyse the decimators. The World Economic Forum’s Cluster of Innovation Model provides one view of fintech and breaks the market into 11 major sectors and 33 market segments as shown below.

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All these sectors and segments have active investments by VCs and other investors. Using the Cluster model divided by the total investments equates to $US3.99 billion per sector and $US1.3 billion per market segment over nine years.

The key question is whether this level of investment is sufficient for major disruption. Uber, for example, has raised $US11.45 billion in funding and debt in 14 funding rounds since March 2009 and has had some success in some taxi markets – markets much smaller than financial services.

Yet Uber has raised the equivalent of 26 per cent of total fintech funding. Meanwhile AirBnB has raised $US2.95 billion and Snap (creators of SnapChat) $US2.63 billion.

Total fintech investment by VCs from 2009 to 2015 is $US31.3 billion while total VC investments over same period is $US476.4 billion. Therefore, fintech is only 7 per cent of all VC investments – it is not a dominant category.

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In order to establish the health and likely success of fintech it is necessary to review the major phases of development. These include angel investing, VC start-up investing, the unicorn phase and exit-through-IPOs or M&A sale.

The major fintech angel-investing and start-up categories are:  

Peer to Peer Lending: Lending to consumers using online, mobile and social media that matches lenders directly with borrowers.

SME and business lending: Mobile, online and social media lending services targeted at small-to-medium businesses.

Student loans: Direct lending to students using mobile, online and social-media channels.

Point of sale/online payments: Tech services targeting online payments, point of sale payments and related services .

Crypto currencies: Cyber or digital asset designed to work as a currency or a value exchange.

Digital banking: Retail banking using social media, mobile and web based services often supported by tools and rewards e.g. budget tools.

Local and international remittances: Remittances services for local person-to-person payments and international transfers using social media, mobile and the web

Wealth/investment and related tech: Investment and pension products using mobile, social media and the web.

Insurances and tech: Insurance and tech services using web, mobile and social media.

The VC Investment in start-ups per segment is shown below with the percentage of the total VC investment in fintech.

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The leading segment is P2P Lending with $US5.2 billion followed by three segments - SME lending, POS/online payments and digital banking.

It is significant these nine segments total 67 per cent of fintech investment. It is likely therefore any major disruptor will emerge from these segments.


Unicorns are start-up companies which achieve valuations of $US1 Billion dollars or more. US research house CB Insights has 174 start-ups rated as Unicorns with valuations of $US626 Billion – Uber is the top- rated unicorn valued at $US68Billion

Fintech companies in the unicorn list are considered the most successful of the start-ups and the nearest to an exit by IPOs or acquisition.

There are 25 Fintech Unicorns with valuations of $US75.95 billion, 12 per cent of the total. Of those, 21 of the Unicorns are in the US and China with one in India, Netherlands, Sweden and United Kingdom.


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Fintech IPOs form the smallest part of the fintech M&A sector. Research by McLean Roche Consulting reviewing M&As in 2014 and 2015 showed  86 per cent of transactions are M&A acquisitions of fintechs by other, often larger players with 8 per cent unable to IPO or find a buyer – leaving 6 per cent which IPO.

There were 77 fintech IPOs from 2009 to 2015 with $US22.5 billion raised in the IPO’s. Since 2008 72 per cent of fintech IPOs are still trading – 28 per cent are no longer trading.

The peak years for IPOs was 2010 with 18, 2014 with 17 and 2015 with 12 while in 2016 year to date there have only been six with a total of $US1 billion raised.

This raises the question: was between 2010 and 2015 the high watermark and has the peak for fintech IPOs past?


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Fintech’s first decade is high on hype and spin but very low on delivering its ‘vision’ of a total disruption of financial services.

Bluntly, fintech to date is not innovative enough and investment is insufficient to deliver a definitive financial-services breakthrough. There is no fintech 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 which will be acquired or IPO. But they haven’t to date.

Meanwhile, the sector faces some serious headwinds which will challenge investors, start-ups and those interested in M&A.

Increasing interest rates will challenge the valuations which are currently 50 to 60 per cent 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 - $US43.9 billion - is not enough to create the next financial service giant.

Facebook founded in 2004 with an initial $US500,000 investment by Peter Thiel, IPOed in 2012, is currently worth $US330 billion

To reach the IPO goal, $US2.4 billion, including $US715 million in equity, was raised. The largest fintech sector, P2P lending, has only $US5.2 billion in total investment over nine years.

The P2P example is salient. Launched when money was cheap, the sector has realised it is not quite easy to build a billion-dollar business.


The incumbents 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 $US7.6Billion fraud by Ezubao in China, Lending Club and OnDecks stock being trashed due to doubtful lending practices while Prosper lent $US48,000 unsecured to the two San Bernardino terrorists months before the attack.

These incidents feed the narrative 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 including factoring companies, point-of-sale payments, online services, digital banks and currency exchanges are now a dime a dozen. Most of the ideas are laser focused on a small segment and will not build scale quickly.


Australia is a late starter in fintech with initial momentum only starting in 2014. The market here runs the risk of ramping up investment just as the rest of the world is deflating.

The enthusiastic start-up’s key challenge is the realisation 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 freewheeling start-ups and banks with their structure, 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. As an investor and participant in the VC sector, my view is fintech in its current state could well repeat this experience.

Grant Halverson is chief executive of McLean Roche Consulting and a former financial services multinational CEO and financial technology CEO. He has been an investor in Fintech for the past five years.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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