Shifts in regulation, advancements in technology and customer demand are all driving the current explosion in the financial technology (FinTech) space.
The Financial Services sector has historically been reasonably traditional in many of its practices and largely dominated by large incumbent multinational firms formed through rounds of consolidation. However, following the global financial crisis, the combination of significant changes in financial regulations, customer demand for financial products and services that was left unmet by a crippled and illiquid system, and advancements in technology, have lowered barriers to entry and created unprecedented opportunities for financial technology (FinTech) companies to develop innovative solutions to both complement and compete with the incumbent players.
Moves by governments to reduce the power of large financial institutions has led to the rise of many disruptive solutions in the areas of consumer finance (borrowing and lending), capital markets (trading and capital raising), payments (mobile payments and processing) and beyond. Investments into, and successful exits from, the FinTech sector have been increasing year on year for the past 3-4 years, demonstrating that this is a lucrative time to be involved in this space.
The Current Rise of the FinTech Market
The global financial crisis of 2008-2009 drastically altered the landscape of the financial services industry. Credit markets dried up around the world resulting in dramatically lower lending levels to consumers and corporations, and risk, security and compliance concerns within financial markets had been underestimated, causing many large traditional financial institutions to fail.. This resulted in significant changes in financial regulations in recent years, which when combined with the advancement of technologies such as mobile and wireless communications, smart sensors and big data analysis, has created opportunities for entrepreneurial financial technology (FinTech) businesses to develop innovative products and services to both complement and compete with industry incumbents.
Given this recent period of volatility, regulatory change and technological advancement, the financial services industry, previously protected by high barriers to entry and economies of scale, is now facing an unprecedented period of disruption.
FinTech Industry Definition & Key Players
The FinTech sector covers a wide array of companies which provide an array of products and services within financial services. These can be broadly categorised into the following sub-sectors: [from CBInsights]
Capital Markets Technology - Companies that provide tools and platforms to facilitate the buying and selling of securities, including foreign exchange, for investors and corporations.
Payments – Companies that offer technologies to facilitate the payments process including cutting processing costs, and handling virtual currencies and mobile payments.
Data Analytics – Companies that leverage big data for financial matters including risk management, fraud detection, calculating insurance premiums and credit scoring.
Banking & Corporate Finance – Companies that complement or disrupt traditional banking and corporate finance practices such as loan origination, fundraising and mobile banking.
Personal Finance – Companies that help individuals manage a wide variety of finances including stock portfolios, personal budgets and taxes through technology.
Some of the leading firms in each of these sub-sectors are listed below. We've pinpointed 42 of the leaders in the FinTech space and included them in the accompanying DataFox watchlist (must be logged in to DataFox to view).
|Capital Markets||SecondMarket, eToro, Xoom, OANDA, CurrencyCloud, TransferWise|
|Payments||Square, Boku, Stripe, Braintree, Monitise, Klarna|
|Data Analytics||Markit, DataSift, Lifelock, Wonga, Credit Karma, Opengamma|
|Banking/Corporate||OnDeck Capital, Lending Club, Prosper, CommonBond, Wonga, Borro, Kabbage, FundingCircle|
|Personal Finance||Betterment, Wealthfront, Yodlee, Intuit (Mint), Nutmeg, Learnvest|
Further, we can clearly see the relative newness of this industry, as the majority of the current leaders in this space are less than a decade old. This comparative trajectory from the FinTech DataFox watchlist, shows the age of the 42 companies in relation to their DataFox Quality Score (an exclusive metric used to pinpoint leaders in any sector):
FinTech Market Size
Market size for the FinTech sector in aggregate is difficult to estimate, as it is such a broad and fragmented industry. One proxy for this is the level of IT spending in the Banking sector. While this is not a clean measure, as it includes expenditure on more traditional technology such as IT hardware (PCs and servers etc.) and software (database and enterprise management etc.) and excludes other areas such as peer to peer finance, it does provide a useful approximation of the total addressable market and its growth potential. Banking IT spend by is expected to total $179.2bn in 2013, split roughly equally across Europe, North America and Asia-Pacific [from Celent].
However, growth rates are expected to differ hugely across regions, with Asia-Pacific accounting for the lion’s share of the growth while European investment levels remain static due to prolonged political and economic turmoil.
Within specific subsectors, there are more detailed estimates of market size:
|Capital Markets||Foreign Exchange: global FX and remittance market $513bn in 2011, rising +7% by 2015.|
|Payments||Mobile payments: $17bn in 2013, rising to $110bn by 2017.Virtual currencies: $2.1bn in 2012, rising to $4.8bn by 2016.|
|Banking/Corporate||P2P lending: $1bn in May 2012 in US, £250m in 2012 in UK, rising to £1bn by 2014.Crowdfunding: $3.2bn globally in 2012.|
|Personal Finance||Personal wealth management: market globally $3.9tr of retail assets under management.|
The FinTech public DataFox watchlist gives insight into the largest investors and fundraisers in this space:
FinTech Recent Trends
Since 2008, over $9bn has been invested into the FinTech sector across a total of more than 1300 deals. During this time, the total level of investment and the total number of deals has been increasing year on year. Based on data up to June of last year, 2013 is expected to be a further improvement on 2012, with over $2.5bn invested, spread across 450 deals [from CBInsights].
FinTech Investment by Subsector
Although historically the Payments subsector has been the largest recipient of investment within the FinTech space, more recently there has been growing interest in the Banking and Corporate Finance, Personal Finance and Data Analytics subsectors.
FinTech Investment by Stage of Financing
Between 2008 and 2012, the proportion of deals represented by seed and angel round investments has been increasing. This is also manifested in a decrease in the median deal size, which has dropped from $6.5m in 2008 to $2.0m in 2013, reflecting reduced start-up costs and lower barriers to entry over the years.
FinTech Exit Opportunities
Exit opportunities for FinTech firms has been healthy through 2012, but is expected to decrease in 2013, which included the notable IPO of Xoom, the online-to-offline money-transfer company.
Policy & Infrastructure Improvements
The JOBS (Jumpstart Our Business Startups) Act, passed in 2012, now allows private companies in the US to publicly advertise and market their securities online and raise capital via crowd-funding. Title II of the Act, implemented on September 23rd 2013, allows capital to be raised from accredited investors, i.e. high net worth individuals with an annual income above $200,000 or assets above $1,000,000, to invest in such offerings. Proposed plans for Title III, which will broaden the scope to include non-accredited investors, have also now been put forward by the SEC, with a view that this will be implemented in the near future. Other geographies such as the UK have already legalized general solicitation of securities to the public via equity crowd-funding portals.
Virtual currencies such as Bitcoin, which has been in circulation since 2008, have recently emerged as an alternative medium of exchange. Virtual currencies have the advantage of being more portable, more secure and easier to transfer internationally than traditional fiat currencies, and their growing popularity has raised concerns amongst financial regulators eager to control the risks. For now, they remain a legal grey area, but plans to regulate these currencies should help them become a recognised mainstream store of value and help the industry around the storage, processing and provision of virtual currencies continue to grow [from Bloomberg].
In developed countries, smartphones are increasingly being used to access bank accounts. For example, a study in Europe showed that almost 30 million people did this in 2012, representing an average usage increase of 85% over a year earlier, with the UK leading France, Spain, Germany and Italy [from comScore Data Mine].
In developing nations, SMS-based mobile banking systems which enable payments and peer-to-peer money transfer have been a key way to extend financial inclusion. Companies such as M-PESA (part of Safaricom) and Kopo Kopo have successfully pioneered the roll-out of the mobile banking ecosystem in the absence of a traditional physical branch network or fixed telephone line network. There has been tremendous growth in this area, as GSMA has deployed this capability in 140 countries, with 104 more planned [from GSMA].
FinTech: External Sources of Information
Below is a list of useful links to key resources and knowledge within the FinTech sector:
- American Banker: http://www.americanbanker.com/fintech100/
- FinTech 50 watchlist: http://www.fintech50watchlist.com/
- FinTech Innovation Lab: http://www.fintechinnovationlab.com/
- Banking Tech: http://www.bankingtech.com
- UK Crowd-funding Association: http://www.ukcfa.org.uk/
- Finovate: http://finovate.com/
For a complete list of 42 financial technology companies, check out the Watchlist below. Please use the comments section below to share your thoughts and the FinTech services you use.
Want more exclusive insights? Signup for the FREE weekly DataFox Digest!