The fintech sector continues to show growth and innovation. At the same time, it is not an industry that is dominated by the biggest names. Innovation and a creative approach to technology allows smaller start-ups to compete toe to toe with more established brands. This makes it a very popular choice for those looking for the highest growth investment opportunities.
Venture capital investment funding of fintech start-ups topped $32 billion globally in 2018 according to CB Insight. At the same time, in 2018 there were 30 fintech exits in the US at over $7 billion in value. M&A activity is expected to accelerate as financial services incumbants acquire emerging fintech companies in an effort to stay competitive. With more fintech unicorns than any other industry vertical, fintech is widely tipped to remain one of the highest returning VC sectors with no shortage of high potential areas to disrupt in financials services.
For investors that have not already jumped on the fintech bandwagon, fear not as the next wave of value creation from younger fintechs could well be even bigger than the first. We are still in the early days of this revolution and as more of the first movers attain multi-billion dollar valuations, early employees will go on to start their own new more interesting fintech companies that continue to offer better financial products to consumers, empower more efficient payment channels and create a more open financial system.
Fintech technology is becoming key to small and large businesses alike with its focus on customer needs. Financial information and processing is made readily available allowing consumers a means to conduct instant, frictionless, digital transactions at low cost and at unprecedented speeds.
Over $150 billion could be invested in fintech companies over the next 3-5 years, according to PricewaterhouseCoopers. The mark of a fintech company that will succeed often boils down to the ease of audience acquisition.
As with all technology companies, investors should look for fintech companies with intellectual property that creates barriers for rivals. Ideally they should also be growing their addressable market through expanding their range of product and services.
What are the main sectors covered by fintech
As in all popular investment areas, fintech seems to cover an increasingly wide range of technologies.
A current market definition of fintechs is venture-backed organisations that are:
Technology focused companies that develop software to compete with traditional financial services institutions (eg banks, credit card networks, insurers etc) in the delivery of traditional financial services (eg lending, payments, investing etc) and/or;
Software tools providing ease of access and efficient functionality for companies and individuals to use traditional finance functions (eg accounting, point of sales systems etc).
Stripe is one of the fastest growing fintech companies in the last few years, with the latest $100m funding round valuing the company at $22 billion. Stripe provides the technology for their customers to build its payment tools into their own smartphone apps and websites.
Square Inc is probably the most successful fintech IPO, listing at $9 in late 2015 and now valued at over $31 billion and trading at over $74 per share (1)). Square was founded by Jack Dorsey of Twitter fame and provides credit card readers and apps that plug into mobile phones and tablets.
JP Morgan and Goldman Sachs have been investing in blockchain technology widely seen as a major financial sector disruptor moving forward.
Can Europe compete in this fast growing market?
Much discussion and analysis has been devoted to why Europe does not seem able to compete with the US or China in creating tech giants.
A number of reasons have been suggested; Lack of funding with tech firms in Asia and US having greater access to capital, cost of hiring employees being four times more in Europe, greater regulation and bureaucracy….
One area where Europe has managed to compete is in creating successful fintech companies like N26 (free mobile banking with Mastercard attached), Transferwise (online service offering better exchange rates and low cost money transfers) and Revolut (mobile based current accounts offering range of banking services). Fintech start-ups have become some of Europe’s most valuable companies over the last few years.
Fintech is fast paving a new way for the future of the financial world. Digital technology is changing the competitive landscape in e-commerce, payment networks, online lending, money transfers, business to business payments, personal finance and banking.
The European Commission has now also published an Action Plan in order for Europe to enhance its reputation as a global hub for Fintech companies.
Even though fintech start-ups were originally considered a threat to traditional financial leaders, it has transpired that banks are providing the support services for the fintech community allowing them to focus efforts on improving customer experience, innovate further technology and expand the services offered.
The 2018 EU’s Revised Payment Services Directive (PSD2) has forced major banks to share data with third parties and this has led to greater opportunities for fintech companies to initiate transactions through the banks.
London is at the forefront of European technology with the UK creating more multi-billion dollar unicorns than anywhere else in the world bar the US and China. Last year UK entrepreneurs created 13 unicorns – as many as Germany, France and Sweden combined – with investors pumping about $5 billion into British technology in 2019 thus far.
Where Britain has enjoyed success is in deploying the latest technology in industries where we already enjoy an advantage such as retailing, advertising, fashion and above all financial services.
To continue to lead the way on fintech, the British educational system needs to marry technical knowledge with creative flair producing students with the problem solving nous that is fundamental to growing new businesses. The UK should continue to focus on start-ups founded on the back of advanced scientific research from our leading Universities. Fintech will continue to develop applications from emerging technologies such as artificial intelligence and blockchain.
(1) Share price correct at market close 20.06.19
The Street – Top 10 Fintech Companies to Watch
The Times – Business Comment 13.06.19
TechCrunch – 2019 Looks to Continue another Lights-out Year for Fintech Start-ups
HowMuch.net Understanding Money – Visualizing the Funding Behind the Most Innovative Fintech Companies
Investors.com – Fintech Companies to Buy and Watch
Investopedia – The World’s Top 10 Fintech Companies
BankingTech.com- Europe’s Army of Fintech Start-Ups
CSS Partners has raised over £175m for entrepreneurial companies since 2001. To learn more about how we enable private investors seeking higher capital growth to invest with confidence in smaller companies click HERE.
Investments offered by CSS Partners are not appropriate for all investors. Our free client service aims to be of benefit to high net worth and sophisticated investors looking to achieve higher returns.
The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.
Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.