A closer look at the Fintech sector: Q2 2016 investment activity and industry trends

19 October 2016

The financial technology sector focuses on different areas within the financial industry, including digital currencies, P2P crowdfunding and investing, online payments systems, and personal financial management. Over the past several years, funding for the Fintech sector has experienced a steady increase. However, in Q2 2016 the VC investment activity dropped due to uncertainties in global markets mainly associated with the presidential race in the USA and the Brexit referendum in the UK.

Since the beginning, the Fintech industry has experienced a great steady growth in funding. Venture capitalists saw potential in digital innovations and started to invest in new generations of entrepreneurs and start-ups wishing to transform the existing financial environment. In 2011- 2013, the Fintech investment activity hit $4.05 billion. Later on, in 2013-2015, the market saw a record-setting investment growth. In 2014, Fintech companies globally drew around $12.2 billion, in 2015 – around $19.1 billion.

Fintech funding in Q2 2016

According to the latest data from “The Pulse of Fintech,” a quarterly statistics report created jointly by KPMG Enterprise/International and CB Insights and covering all major financial-technology trends, in the beginning of 2016 the industry saw a big rebound in funding. The investment amount in the Fintech sector in Q1 2016 totaled $5.7 billion; VC-backed Fintech start-ups raised $4.9 billion.

As for Q2 2016, overall global investment via venture-backed/non-venture-backed companies hit $9.4 billion, while venture-backed investment saw a significant drop – just $2.5 billion. Despite this sad decline happened due to unstable market conditions, it is expected that this year funding for the Fintech sector will exceed the investment level of 2015.

As for VC investment activity in different parts of the world, the US Fintech market is currently dominating the scene: American startups raised $1.3 billion of the above-mentioned $2.5 billion. Despite a slight drop in UK-based funding happened due to post-Brexit unstable market conditions, European companies raised $369 million across 43 deals, in comparison with $300 million raised in Q1.

Fintech sector

The European market leader is Germany: it received 80% more funding than British businesses and overtook the Fintech throne in Q2. Plus, the country can make boast of the largest European funding deals:  for example, comparison site Finanzcheck raised $46 million, online-only bank N26 raised $40 million, and payments service AEVI raised $34 million.

Despite an increasing number of Fintech deals, Asia became the outsider of the investment race: due to the lack of significant funding rounds, the region saw a dramatic decrease in VC funding, from $2.6 billion in Q1 down to just $800 million in Q2. However, while the VC funding level remains low, the popularity of the Fintech sector in Asia is still tremendously high – Alibaba Group Holding’s affiliate Ant Financial Services Group raised $4.5 billion from private investors.

Fintech market trends 

On the global scale, the Fintech industry is steadily growing. However, while 2015 was the year of new Fintech opportunities with an increasing number of novelty business models and revenue-generating areas, 2016 has become the year of revaluation. VC investors became more risk averse and shifted their attention from newcomers to well-established companies with proven business models.

As for the industry trends, the financial services sub-sectors getting special attention from investors include lending and payments platforms (especially in Asia), blockchain – the potential of decentralized computer networks has finally become obvious to banks and financial corporations, and robo-advisors, web-based wealth management solutions used to build diversified portfolios for online investors.

Despite these key segments, investors are also highly interested in such new products as “InsurTech”, an emerging market of digital technologies used to solve various operational problems in the healthcare and car insurance areas, and “RegTech” – a new concept aimed to help companies and entrepreneurs comply with a wide range of financial regulations and reporting requirements.

Fintech market trends

For example, in Q2 2016, blockchain-based P2P payments technology company Circle Internet raised $60 million to fund its expansion into China; Clover Health Insurance, a company providing various kinds of health insurance plans, raised $350 million. Oscar Health Insurance Co. that positions itself as a digital alternative to traditional health insurers, raised $400 million. Betterment, one of the major players in the web-based investment advisory services industry, raised $100 million.

Surprisingly, much of the investment in Fintech comes from old-guard banks which finally changed their point of view and stopped considering Fintech companies as their potential killers or competitors. The market leader is Goldman Sachs with its 11 investments, including such noticeable deals as funding Asian comparison platform CompareAsia, financial software provider Plaid Technologies, and payments application Circle.

New technological advancements favored the appearance of a new generation of entrepreneurs and start-ups looking to reform the existing financial ecosystem and offer a faster and more convenient customer experience. Since 2010, when the first financial services providers appeared on the scene, the Fintech sector has experienced a significant growth. Regardless of the decline in VC investment in Q2, 2016 carries the potential to become productive for Fintech and shape the future of financial services.

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