Simon Nicholas, Director at KPMG Isle of Man, reviews Q1 activity and global trends in the fintech sector.
After a year marked by blockbuster deals, 2017 started off on a fairly modest footing with fintech deal value hitting $3.2 billion globally.
While not a steep drop from the $4.15 billion registered in Q4’16, it is a far cry from earlier quarters and marks the continuation of the new subdued level observed over the past three quarters.
Q1’17 saw 260 deals closed in the fintech space and, in terms of volume, venture financing now seems to be oscillating around early 2014 or full-year 2013 levels, having fallen from the peaks of 2015. Venture capital (VC) investment, however, remains on the historically high end at $2.3 billion.
Mergers and acquisitions (M&A) deal value was particularly low while private equity (PE) deals activity and investment increased, although both remained well below historical highs.
While the US led fintech investment in Q1’17, with $1.5 billion across VC, PE and M&A, it is evident that a wide variety of fintech hubs have developed around the world. This quarter’s top ten global deals demonstrate this diversity, with deals in the US, Canada, India, China, Sweden and the UK making the list.
In Europe, fintech venture activity was boosted by several huge rounds with a total of $610 million invested, the highest tally in years. Further afield in the Asia-Pacific region, fintech is still an emerging ecosystem with considerable fluctuation on a quarterly basis although the outlook is for more mega-deals either as strategic investments or the development of new corporate divisions.
In general terms, there has been exponential growth in fintech over the past few years and with companies and technologies now maturing in leading jurisdictions, investors appear to be looking for early investments to achieve scale. This increasing focus on performance over potential is a natural progression with investors concentrating on making their investments work rather than increasing the size of their portfolio.
Q1’17 saw a number of mature fintech companies and fintech investors focusing on expansion as a means to fuel growth, either geographically or through product or service expansion. Unicorn company, SoFi, is a great example of this, aquiring Zenbanx and gaining the ability to provide more functions of a traditional bank, including customer deposits. SoFi also raised over $450 million in order to fuel expansion into the Australia and Asia markets.
Corporates who have continued to invest in fintech have also demonstrated increased interest in partnerships and alliances in order to leverage potential innovation. Through these models, fintech companies can gain access to customers and customer data that may be unavailable to them independently. At the same time, corporates gain access to technologies and tools that can help them provide more attractive and cost effective solutions for their customers.
Q1 saw a limited number of banks leaving the R3 blockchain consortium, including Goldman Sachs and Santander. Despite this, the consortium model continues to evolve as a way to develop blockchain and the quarter saw a number of new consortia announced, including the State Bank of India’s National Bank Blockchain Consortium. The insurance industry also saw an expansion of blockchain-focused consortia, with B3i announcing a number of new members. Over the next quarter, there is likely to be a continued focus on developing more robust business cases for blockchain solutions, and further interest in the insurance and asset management sectors.
Q1’17 saw VC-specific insurtech investment drop to $243 million across 43 deals globally as the sector experienced a pause following strong growth in 2016. This lull is not expected to last, particularly as insurance companies around the world seem to have begun to feel the pressure to embrace insurtech innovation.
Investors are showing continued interest in regtech, with strong early investment in Q1’17 following 2016’s peak. In addition to reducing compliance costs through automation, regtech solutions are increasingly supporting a broader remit, delivering capabilities to support the growth agenda. Regtech startups in the US and UK currently garner the lion’s share of VC attention, but activity in Australia, Singapore and Hong Kong shows signs for growth.
Over the next quarter and throughout the remainder of 2017, fintech investment as a whole is well poised for growth. More established fintech companies are likely to pursue expansion opportunities, either by bringing niche solutions to new markets or by expanding the products and services they provide to their existing markets.
Insurtech and regtech are likely to grow on the radar of investors, with regulatory issues like licensing coming to the forefront. Some larger fintech companies may look at obtaining banking licenses in order to expand their business models and product offerings.
On a technology level, AI is expected to be a key area of focus for many investors, in addition to smart data and predictive analytics. With new Payment Services Directive regulation approaching in Europe, open banking and Application Programming Interfaces (API) offerings are also expected to gain significant attention.