2020 has been a whirlwind of a year, and a lot of what has happened due to COVID19 barreling down on countries worldwide has further intensified some of the key trends that were already underway well before the pandemic. If we zoom in on the fintech market, we can determine that some of the trends that were becoming evident included Gen Z and Millenials progressively turning towards more digital options (mobile app services) when it came to their financial needs, and slowly turning away from the traditional big banks. Additionally, regulations in certain markets such as the Revised Payment Services Directive (PSD2) which was administered in the EU, allowed for “open banking”, which meant that 3rd parties could access big banks’ data, increasing pan-European competition in the payments industry and ultimately providing better consumer protection through safer and more secure payments.
Old-school banking institutions have had to start competing against more limber neobanks (a.k.a. challenger banks that provide services through mobile apps), which in stark contrast to the older banking models provide fully digital services to consumers through a much more modern, branchless system. These virtual competitors have been able to tap into markets that have been historically ignored by the established brick-and-mortar banks. These market segments include freelancers, immigrants, and even small businesses, which these apps successfully marketed to and won users over. We have previously discussed the growing popularity of trading apps around the world in a previous article, highlighting that these apps have successfully taken advantage of the opportunity to reach users that historically were barred from the market due to large entry and interest fees. So what are the opportunities ?
One set of data that should be looked at is the total value of investments into fintech companies worldwide, represented in the graph below. We can see a significant spike as of 2019 with almost $136 billion (USD) being invested overall in this sector. We can also see that there is a clear upwards trend. Let’s take a look at the data:
Total value of investments into Fintech companies worldwide from 2010 to 2019 (in billion U.S. dollars)
Now let’s look at what’s happening in the U.S., noting that as of 2019 North America was the largest region in the fintech market, making up a whopping 40.8% of the global market. In second place we have Asia Pacific, Western Europe and other geos.
So how has COVID19 affected this general trend in this region? Well, we know that once the pandemic hit, the way that many companies operated has changed significantly, and while we have seen an unprecedented number of brick-and-mortar businesses closing their doors, on the other hand many “digital-only” businesses have seen growth and opportunity. So what does the Coronavirus Economy bring to the table for the foreseeable future? For starters, we know that consumer behaviour itself has drastically changed, mainly in the sense that online activity has spiked, pushing users to use apps and online/digital methods to complete essential tasks including banking.
In fact, amongst the six major U.S. industries which Crunchbase has identified in their Opportunity Index Report as showing promising growth is Payments, which encompasses fintech, mobile payments, and financial services. This industry alone makes up 12% of the almost $7 billion of venture capital funding for April 2020 in the United States alone. Wow.
One key aspect of this sector, as well as others that have seen significant growth during the Pandemic, is that they all offer some sort of technology or other type of innovation which offers value to society, specifically in helping people navigate the post-COVID19 world. Clearly, providing people with a better way to complete daily financial tasks while reducing the overall risk of infection is one of these critical innovative solutions. Adaptation has been the catalyst for growth in this industry. Companies like Stripe, Chime, Affirm, and Cortera have are seeing significant success, not just from aggressively marketing the mobile apps themselves and increasing user acquisition but also through significant funding.
So who is leading the charge within the fintech industry?
Looking at the latest report from Crunchbase we can analyze the largest funding in the payments, insurance, banking, and lending sectors. Focusing on payments, banking, and wealth management here is a non-exhaustive list of some of the bigger players:
- India-based One97 valued at close to $16 billion.
- Stockholm-based Klarna valued at $5.5 billion.
- San Francisco Bay Area-based Marqeta, valued at close to $2 billion.
- San Francisco Bay Area based Stripe, valued at an incredible $35 billion.
- San Francisco Bay Area-based Chime, a challenger bank, valued at $5.8 billion.
- Germany-based N26, valued at $3.5 billion.
- Brazil-based Nubank, a valued at $10 billion.
- San Francisco Bay Area-based Robinhood, valued at $7.6 billion,
- San Francisco Bay Area-based Carta, valued at $1.7 billion.
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What do some of the key investors have to say about this growing industry?
Again from the Crunchbase report, here are some key quotes:
“Fintech is driving new business models as opposed to being a business model in its own right. More and more categories will include fintech elements in order to be competitive. For e-commerce trends, or new ways of servicing verticals — for example cosmetics, hairdresser and barbershop verticals — these booking systems are providing full operating systems for large parts of the economy.”
Ryan Gilbert, Propel Venture Partners.
“We believe one of the most important trends in fintech is the rise of a new generation of financial infrastructure companies (akin to AWS or Google Cloud Services). These financial infrastructure companies — like Galileo and Marqeta — are enabling any business to offer financial products (like debit cards, overdraft protection, savings plans, or credit). As a result, new ‘fintech’ brands — like Chime, Sofi, or Divvy — are growing faster than ever since they no longer have to build core banking products themselves; these products are accessible via APIs.”
Cherry Miao, Accel
We are seeing a progression towards digitization of these essential banking services, trends that have been exacerbated by the Pandemic but that will continue on into the future. The traditional brick-and-mortar banks will have to quickly adapt in order to compete with neobanks and continue to sustain significant revenue streams into the future. Large potential has been uncovered by challenger banks in markets that were previously ignored, and so “if you’re not growing you’re shrinking” will become the mantra for many of these financial businesses.
As of right now the biggest opportunities as far as dollar volume as in the U.S. with $16 Billion as of 2019.
And as a last thought, financial services’ growth has been increasing exponentially — In 2019 fintech made up 16% of total venture funding in comparison so just 10% in 2010, tripling in less than 10 years.
As intense as 2020 has been, hopefully we can look at the silver linings, and continue to look forward, finding new ways to innovate, not just in the fintech and mobile and digital industry but in all sectors in order to bring forth a better world. Let’s look at the opportunities that await us and spring forward.
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