Financial technology – or fintech – is an exciting, growing sector offering many attractive and new investment opportunities in 2021. This piggybacks off the deluge in funding for the tech sector as a whole in recent years, with $254bn invested globally into 18,000 startups (through venture capital funds, or VC funds) in 2018 alone. In this industry report, our team at Bure Valley Group looks at the growth in fintech in recent years, projections for the years ahead, a review of major players and rising stars, an overview of some of the investment opportunities and some reflections on the risks and rewards of this sector.
Fintech refers to companies which seek to improve – and automate – the delivery of financial services using technology. The overall aim is to help customers (and other businesses) gain better control of their finances, improving efficiency using algorithms and software via personal computers and – increasingly – smartphones.
Fintech originally emerged to support the systems of major financial institutions (e.g. managing customers’ banking information). Today, it has shifted this business focus more towards the end consumer, spreading across different sectors and industries including education, charities and even cryptocurrency development.
Fintech has witnessed impressive global growth over at least the past 5 years. In 2018, the market capitalisation was $127bn with a predicted annual growth rate of ~25% until 2022 (to $309bn). Out of the total $254bn invested by VCs globally in 2018, fintech accounted for nearly 50% of this ($128bn). Studies suggest that the sector, as a whole, is steadily maturing. This can be seen in developments such as the following:
- Banks and other institutional players are using fintech increasingly (e.g. making their own apps and software-based products).
- Investors seem to be moving more of their focus to B2B, away from B2C.
- Early-stage deals are lower than in previous years, whilst Series B funding is growing.
- Increasing regulation is resulting in more scrutiny of the fintech sector.
- Funds that invested in the “1st generation” of fintech (i.e. companies which built on the chaos after the 2008 Financial Crisis) are maturing and returning money to investors.
- In terms of global geography, more “mega deals” are happening in the non-western world; where much of the population still lacks a bank account, providing opportunity for immense growth (e.g. China and southeast Asia).
Example fintech disruptors
In 2021, consumers are increasingly turning to digitally-based services for managing finances. The rise of digital-only banks is a good example, which threatens traditional banks with physical branch locations. Some prominent case studies here include Monzo and Starling Bank, which are FCA-regulated and provide app-based current accounts to UK customers. Here, the idea is to make everything faster and easier. For instance, with Starling Bank, to open an account all a customer needs to do is download the app and follow the instructions. There is no need to visit a branch. Overseas ATM withdrawals are also free of charge, unlike many major banks.
Other fintech disruptors include Mint – a money tracker and manager app which allows users to connect their credit cards, loans, investments and other finances so everything is controlled in one place. Companies like eToro and Robinhood are also challenging establishing investment platforms, offering commission-free trading and investing to ordinary customers. Platforms like Coinbase also now facilitate easy cryptocurrency exchange via their online platforms.
Projections beyond 2021
A range of trends in fintech have also been identified going forwards:
- Big tech moving to wealth management. Amazon, Alibaba and other technology giants have already indicated that they are developing their own products to serve the wealth management needs of high-net-worth individuals (HNIs).
- Increasing robo-adviser adoption. At the end of 2019, one study suggested that, in North America, assets under management (AUM) by robo-advisers amounted to $330bn. Yet these are projected to increase to $830bn by 2024.
- More regulation. With the onset of COVID-19, financial institutions have been pushed to offer more services online to reach customers more effectively. Yet around the world, many countries have increased their scrutiny of fintech platforms. In China, for instance, Ant Group was forced to halt its IPO for Alipay. In the USA, moreover, both Congress and the Government are exploring tighter regulations on cryptocurrency platforms.
What this means for investors
With fintech forecast to continue growing at such a fast pace in the coming years, investors are understandably reluctant to avoid the sector due to the risks. However, risks do need to be kept in mind and mitigated. Diversification will be a key strategy here. For instance, an investor who holds stock in traditional wealth management companies will want to bear in mind the headwind coming from big tech competition in the near future. These stocks should also be examined for their plans regarding the broad customer move towards robo-advice. Do they intend to fight this trend or gradually adopt a robo-advice model into their own business, for instance? Regulatory threats should also be considered. What are governments doing when it comes to the likes of Coinbase and other cryptocurrency platforms? Are they likely to support app-based services or shore-up established players during an economic downturn?
For more adventurous investors who are perhaps interested in startups, fintech is also a great sphere where promising new entrants and staking their claim on the large landscape of growth opportunity in front of fintech. Here at Bure Valley Group, we can help introduce you to some of these great opportunities and offer a range of pre-vetted projects for your consideration.
If you are interested in expanding your portfolio into these kinds of exciting spheres of investing, then we invite you to get in touch with us here at Bure Valley and to consider joining our exclusive investor network:
+44 160 334 0827