Year in data 2016: There are signs that the fintech boom is slowing
Are we past the peak for fintech?
Not if you ask the conference organizers and news editors, we’re not. It is still a sector that generates a lot of talk. But maybe investors are close to sated.
KPMG and CB Insights published their latest ‘Pulse of Fintech’ global study of venture investing in the sector in mid-November 2016. It showed a sharp and continued slowdown in the second and third quarters of last year, both in the number of VC-backed fintech companies raising financing and even more so in aggregate volumes raised.
While quarterly funding volumes peaked at $5.2 billion in the second quarter of 2015, remained strong in the third quarter of that year at $5 billion and started last year at the same robust pace, with $4.9 billion raised in the first quarter of 2016, a decline has since set in. VC-backed fintech companies raised only $2.9 billion in the second quarter of last year and $2.4 billion in the third, less than half what they raised in the same quarter a year earlier.
The number of companies raising money peaked in the first quarter of 2016 at 231, falling to 203 in the second and 178 in the third, the fewest VC-backed fintechs to have raised money since the second quarter of 2014.
One should be wary of taking two data points from one source and drawing a line. Other sources paint a rosier picture. In its third quarter 2016 report on fintech investment, Innovate Finance, looking beyond just VC-backed firms, suggests that by the end of the third quarter of 2016 fintech companies had already raised $15.2 billion of investment for the year, ahead of the $14.9 billion full-year total for 2015.
Innovate Finance seems to have captured very different data from KPMG and CB Insights for the second quarter of 2016, but it agrees with them about the sharp slowdown in the third, suggesting all fintechs raised just $2.3 billion from July to September, down from $6.6 billion in the third quarter of 2015.
Partly that may show the impact of uncertainty following the Brexit vote in London, Europe’s main fintech hub, and in the US in the run-up to the election of Donald Trump.
The chief executive of one London-based fintech tells Euromoney: “I see a massive impact from Brexit. We are in a war for talent, and peoples’ morale here is now really low. The currency of denomination for tech is the US dollar, and I am very concerned about rising input costs. If sterling does go close to parity against the dollar in the run up to a hard Brexit, it will be game over for my company and a lot of others.”
Investment in UK fintech was already falling faster than in the rest of the world, with the total raised for the first nine months of 2016 below that raised in the same period of 2015, according to Innovate Finance.
Is this part of a general pull back? Euromoney has reported at length on the growing pains of marketplace lenders, some of the biggest fintech companies to have emerged in the much larger US market, including several that have already floated publically and saw their share prices collapse last year.
It may, however, denote more of a shift away from Silicon Valley, New York and London as the centres of fintech innovation towards Asia. The three biggest fintech investments in the first three quarters of 2016, the only ones over $1 billion, were for Chinese companies: Alipay, which raised $4.6 billion in April 2016; Lufax which raised $1.2 billion last January and JD Finance, which raised $1 billion also in January.
Neal Cross, DBS chief innovation officer, says: “The speed at which China’s fintech landscape has developed is truly remarkable. It’s gotten this far because China’s landscape has operated in a sandbox-like environment conducive for fintech to thrive – a strong domestic market, coupled with a constant push for innovation and experimentation driven by leading giants, unhindered by international influence. Much of this can be attributed to the favourable government policies and regulations.”