The global fintech funding landscape

A panel of investors at this week’s Fintech Festival in Singapore shared their insights into key trends in the global financial technology (fintech) landscape, and hot areas in regions around the world.

Western markets

In Europe, Deutsche Börse’s managing director, Ankur Kamalia, sees the central theme in fintechs as collaboration. While several fintechs have displaced banks or found a niche, many others struggle to scale up because they lack connectivity or face regulatory barriers to entry. What corporates are doing, he said, is investing in order to complement internal innovation with external innovation.

Stefan Klestil, a partner at Austria-based venture capital (VC) company Speedinvest agreed, reporting that the fintechs in its portfolio collaborate with a licensed institution. He recommends that fintechs never completely depend on one bank to contract their service, since “sales cycles are horrendously long. Having an investment early on is tricky.”

In the US this year, Stanford University Fulbright Fellow Anju Patwardhan observed, there has been a slowdown in VC investing due to 2016 being an election year and expectation of higher interest rates. “That anxiety continues. [There are] two areas of concern. One, what will the immigration policies be for hiring talent. For unicorns [private companies valued at US$1bn+], more than half have at least one founder from overseas. Two-thirds of engineers in the Valley are from outside the US. The other is the new tax rules, and carried interest.” The good news is that “people feel [fintech] valuations have become more realistic.”

While there has been anxiety in the US in the lending space and incidents have caused investors to be more cautious the demand is still strong, reported Patwardhan. Many of the person-to-person (P2P) companies are filling a market gap and lending to the underserved. “The market has not changed much. What has changed is the supply of funding, which slowed. It’s starting to come back,” he added. The incidents also resulted in increased regulator scrutiny, which will bring rationalisation and should prove a good thing in the longer run.

Klestil said the hot areas in the US include machine learning and artificial intelligence (AI) in business-to-business (B2B), and contextual financial services in business-to-consumer (B2C).

Asia and the Middle East

In Southeast Asia, the focus is on the electronic commerce (e-commerce) market observed Krating Poonpol, managing partner of the start-ups micro fund 500 Tuk Tuks. “E-commerce comes first. Alibaba is coming to Southeast Asia; it will be interesting next year onwards.”

Raphael Strauch, managing and founding partner of Nova Founders Capital said he sees Chinese, Japanese and Korean investors, whose markets are already very developed, investing abroad. Historically they have been active in the US for two reasons; firstly to gain access to innovative models and bring them to the home market; secondly because Chinese investors, operating in an overvalued market, are looking for an opportunity to diversify. Patwardhan added that Chinese investors are taking advantage of the internationalisation of the renminbi (RMB) and searching for higher yield, driving investment outside China.

Strauch also sees also increasing interest in Southeast Asia. As recently as three years ago relatively few Chinese or Japanese firms were active, while now there are many. Kamalia added that he also sees a trend of Western investors looking at opportunities within the Asian landscape.

Klestil, whose firm invests in across Europe, the Middle East and Africa (EMEA), also sees growth in P2P or institutional alternative finance, serving markets that are underserved. Tech players offer cheap and easy onboarding and scoring, and cheap handling of the loans, which enables them to offer loans at a margin. “The businesses we invested in – invoice financing – didn’t have a single default.”

Achieving scale

While the US and China are two massive markets where it is possible for fintech companies to go out on their own and achieve scale, Patwardhan suggested that a better strategy in most other markets is through collaboration with banks. “Markets are smaller, the regulatory structure is different and it’s hard to understand the local environment.”

Strauch, however, takes an opposite approach. In China “you have to share with 4,000 competitors. In Southeast Asia, there are 600m people, if you move into lending into Thailand, you’re pretty much alone. There’s a big opportunity.”

B2B or B2C fintech

Although much of the funding for fintech has gone into B2C, such as payments, digital banking and wealth management, “that’s starting to shift towards B2B,” said Kamalia. “You’re seeing B2B models where you’re transforming the market infrastructure and using models to change that.”
Patwardhan agreed that data suggests 75% of fintech investment is in B2C, especially in payments. In the past year, however, she also sees newer investment going into B2B or even the emerging business-to-business-to-consumer (B2B2C) model. The scale, though, is still small. “Fintech got US$15-20bn of funding. In context, the technology spend across banks was US$250bn; even if most was legacy and maintenance, US$50bn was spent on new programmes and innovation. The banks’ budget is still two-and-a-half to three times the VC spend.”

It makes sense for investors to look at B2B, she believes; two of the most promising areas being financial health and wellness – where solutions are on financial well-being, and financial inclusion, which is focused on the middle class underserved rather than the unbanked.

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