The Pulse of Fintech

Fintech funding takes a bit of a breather, but corporate interests are coming on strong.

No man is an island. Or, if we’re talking about financing hot sectors, then no sector funding is immune from the overall financial climate. In Q2 2016, Brexit caused a maelstrom of doubt in investments toward UK’s leading-edge financial technology. Brexit, along with generally overheated values in growing ventures, and the uncertainty brought about by the US election cycle led to a drop in Q2’16 Fintech funding of 49%. This funding drop, along with the numerous observations we’ll cover here, are part of The Pulse of Fintech Report (Q2, 2016) produced by KPMG and CB Insights.

Fintech Sectors Gaining Momentum

While a 49% drop in fintech funding may elicit concerns, as always, a few events can skew results; in the previous quarter some large, “super-deals” spiked the results up. In any case, there were still significant deals, amounting to $2.5 billion in total, so by no means has fintech lost its momentum. It’s more likely just taking a breather, waiting to see what transpires in the UK and US.

With the uncertainty in the market, new, emerging fintech startups experienced some unanticipated challenges raising funds; investors were focusing more on established players who already gained traction and momentum. There are certain sub-sectors that are getting special attention:

  • Financial inclusion
    Payments and lending platforms that focus on delivering financial services to the billions of underbanked people (with the current focus being Asia),
  • Blockchain
    Digitally distributed ledger technology to streamline core financial processes like cash and securities settlements,
  • InsurTech
    Insurance technology advancements have not kept pace with developments in other financial areas. Therefore, there are huge opportunities to deliver services digitally from policy handling through to claims,
  • Robo-advisory
    Personalized financial management created by robotic advisors. Think Watson, instead of I Robot, the robot being a computer program with specific expertise in portfolio management.

The news for fintech startups is not all bad; financial corporations are showing more interest in working with this emerging sector. These financial firms are investing in, and supporting, innovation labs that operate internally, or bring together proof-of-concept initiatives under one roof.

Startups focused on fintech are innovating faster than regulators can adapt the rules. This is something that is acknowledged as a gap. It is also what is good about the regulatory sandbox… I think more countries will come up with a sandbox approach to address Fintech innovation.”
- Jan Reinmueller Head, Digital Village, KPMG in Singapore

The Evolution of Fintech

One of the first areas of major growth in fintech was the lending space. Interest in this area has cooled, with much of the blame being put on LendingClub, whose stock was cut nearly in half during the quarter ($8.04 to $4.30 – It was trading at over $25 in 2014). There will, no doubt, eventually be more interest in the area, but investors are looking elsewhere for now.

The most significant change is the new, deep interest of big financial players in fintech. Yes, banks and their brethren have always been interested in technology, but, for the most part, it was business as usual; using technology to do the same things they always have done.

Fintech offers whole new possibilities, whole new ways to create and deliver value, such as artificial intelligence (AI), risk modeling and predictive analysis. The giants are now diving in, building in-house, forming partnerships or acquiring fintech companies.

Over the past year we've seen large financial institutions shift their thinking and engagement model around fintech — from initial skepticism to interest and, most recently, to a stage of active engagement.”
- Anthony Rjeily Principal, Financial Services Digital and Fintech Practice Lead, KPMG in the US

Developments around Regulatory Frameworks

Of special interest to the financial enterprise incumbents, is RegTech; technology to assist financial regulations compliance:

Fintech has a younger sibling — RegTech. RegTech startups are automating and simplifying regulatory reporting and processes. As banks are struggling with the regulations they have to fulfill, a number of startups are creating services to help them solve the complexities faced with reporting and documentation.
- Sven Korschinoski Partner, Financial Services, KPMG in Germany

Political factors are coming into play in what seems an ever-expanding amount of regulations in jurisdictions around the world. One motivator is the Panama Papers, which shined a light on corruption and the financial institutions that profited from it. Brexit, has forced The City to rethink how it will keep its place as the number one financial center. And, the upcoming end of the current US administration, where they will likely push legislation that strengthens regulations.

One interesting development, is the introduction in the UK, of a regulatory sandbox:

The regulatory sandbox aims to create a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences of engaging in the activity in question.
The FCA, Project Innovate and Innovation Hub

With the number of regulations, all the complexities of compliance and the new potential of technology, a sandbox is a smart way to encourage innovation, without the risk. The cost of compliance failure is significant, so taking that out of the equation, should lead to more innovation and one way for The City to remain at the top of the pack.

Australia is currently studying adopting similar structures and the expectation is to offer this opportunity soon. Can other jurisdictions be far behind?

Regardless of a drop in investment, compared to Q1, fintech companies continue to innovate, create value and increasingly, draw interest from major financial companies. Fintech will continue to grow and their innovations will increasingly become part of our everyday lives. Subscribe to our blog to stay ahead of the curve of all the financial technology developments!