Five areas of fintech that are attracting investment
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The world has been transformed in the year since the Financial Times launched its Future of Fintech awards. But while the Brexit vote in the UK and Donald Trump’s election as US president have dominated the news, the world of financial technology has also gone through big changes.
Regulators in Europe and the US are pressing ahead with rules to force incumbent banks to open up the data they hold on customers to third parties, including fintech companies. This push towards “open banking”, although viewed with some misgivings by the incumbents, should create new opportunities for both start-ups and more established fintech businesses.
Meanwhile, the fintech sector set a new record last year when Ant Financial, the digital payments arm of China’s Alibaba, raised $4.5bn in a single funding round.
At the same time, some of the steam has come out of the sector. Overall investment and merger and acquisition activity in fintech almost halved from a record high of $46.7bn in 2015 to only $24.7bn last year, according to KPMG.
This is partly a natural, even welcome, correction after the initial hype. Uncertainty created by the Brexit vote and Mr Trump’s election has also had an effect, however.
Another negative factor was the governance scandal last year at Lending Club, the biggest online lender in the US, combined with disappointing performances by some of its rivals, which turned investors off peer-to-peer lending.
Investor interest continues to rise in some areas of fintech, however, including cyber security, artificial intelligence, blockchain technology and insurtech.
There has also been positive news from the two winners of last year’s Future of Fintech awards. Paytm, the Indian electronic payments company, has thrived following the country’s withdrawal of high-value banknotes, and Transmit Security, the cyber security start-up, recently announced a $40m self-funding round.
It is impossible to predict what kind of companies will win this year’s awards when they are handed out at the FT Banking Summit in late November, but we are expecting some of these growing sectors to feature among the entries:
Total fintech investment in Asia inched up to a new record of $8.6bn last year, although the number of deals fell by more than 8 per cent. More than half the region’s total fintech investment came from one deal: Ant Financial’s $4.5bn funding round.
That deal helped Chinese fintech investment double last year, while most of the rest of the world suffered declines. China is now established as one of the world’s two big fintech markets, alongside the US. Together, the two countries accounted for $9 out of every $10 invested in fintech, according to a recent Citigroup report.
“What is specific about China is that it has had a social and economic revolution at the same time as a technological revolution,” says Ronit Ghose, banking analyst at Citigroup. “With relatively weak existing payment systems and weak existing consumer banks this has allowed the eruption of lots of innovation, lots of change and lots of new entrants . . . It is a very exciting time right now in China fintech.”
The launch of voice-activated assistants such as Amazon Alexa and Google Voice has opened up possibilities for making online banking easier for customers. Banks such as Capital One have already latched on to this trend.
The industry is at the start of what many expect will be a robot revolution, making use of machine learning and big data applications to take on many of the menial tasks currently done by humans in finance, while cutting costs and improving product offerings.
Cyber security shot to the top of the boardroom agenda for banks after one of the biggest bank robberies in history was carried out by cyber thieves on the Bangladesh central bank via the Swift payments system in February 2016. The crooks made off with $81m that was on deposit at the US Federal Reserve.
Total venture capital investment in cyber security companies fell more than 15 per cent last year to $3.1bn, according to CB Insights, the research company. However, recent attacks such as those on Tesco Bank and Lloyds Bank in the UK will have raised it as a boardroom issue again.
In the five phases of the “hype cycle” invented by Gartner, the IT research group, to describe the stages of adoption new technologies tend to pass through, blockchain has passed the peak of inflated expectations and entered the trough of disillusionment. Last year, everyone in finance wanted to boast about their blockchain experiments. Recently, the sceptics’ voices have grown louder.
Most big financial groups remain convinced of the potential for blockchain to revolutionise parts of their industry and several central banks are examining the potential for using the technology to create digital currencies. Venture capital investment in blockchain companies rose by a fifth to $544m last year, according to KPMG.
Canada’s big banks recently launched a project to put customer identities on a blockchain system developed by IBM and SecureKey. Elsewhere, a group of European banks including HSBC, Deutsche Bank and KBC agreed to work together to develop a blockchain system for trade finance.
The insurance industry has been slower than other areas of finance to wake up to the digital disruption at its door. But recently start-ups such as So-sure, Friendsurance, Lemonade, Guevara and Brolly have emerged with plans to transform the sector. Venture capital investment in insurance technology companies doubled last year to almost $1.2bn, according to KPMG.
“There seems to be significant pent-up demand for solutions to the problems challenging the insurance industry — from the need to improve operational efficiencies and cost effectiveness to creating more customer-centric product offerings,” says Murray Raisbeck, insurance partner at KPMG.
“When these challenges are combined with the growing availability of tech . . . there’s little doubt investment in insurtech is going to keep booming.”
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