Advisers, follow the fintech money
Global fintech investment was essentially cut in half in 2016. With this stark shift, it might seem that fintech is taking a turn for the worse. But the reality is very different.
In some markets, too much cash was chasing too few quality opportunities, driving valuations too high, and sending investors to the sidelines. But as the air is slowly released from this bubble, markets will correct, leading to lower valuations, driving more consolidations and acquisitions, and making room for more assets to move back in. And a closer look reveals there are still many markets where the potential is untapped, and many segments of the industry where there is still room to grow.
Fintech will still continue to fuel tremendous disruption across different segments of the financial services industry — and across different regions of the globe. The need to eliminate complexity, increase transparency and create efficiencies is stronger than ever. The demand for greater value is not going away anytime soon. A look at major trends in recent years can help show where will the smart money will go.
As investments increased more than 60% over the prior year, from roughly $29 billion to nearly $47 billion, 2015 was a record year for global fintech funding, according to KPMG’s Pulse of Fintech Report. And an increasing number of big ticket deals were closed. In 2015, there were 94 fintech deals valued at more than $50 million, compared to only 52 in 2014, and just 15 in 2013, according to a study by Accenture.
In 2015, the U.S. was by far the world’s largest fintech market. A total of 615 fintech deals were closed, and total fintech investment topped out at $27 billion, roughly doubling year over year. Europe, was the second largest with nearly 350 deals and total investment of nearly $11 billion. While London remained the dominant fintech hub, with the highest number of deals with the highest valuations, other major markets included Germany and Ireland.
Following this massive inflow of capital — and increasing hype — 2016 saw fintech’s first downturn. According to KPMG’s Pulse of Fintech Report, there were fewer IPOs, with most of the activity concentrated around lending and payments. There was less M&A, with most deals at lower valuations, focused on acquiring the underlying technology, rather than buying into a successful franchise.
The outsized impact of politics in 2016 cannot be overlooked. Yet both of these countries remained leaders in terms of total deals and dollars invested in 2016 — nearly 490 deals valued at nearly $13 billion in the U.S., and 96 deals valued at $610 million in the U.K.
Venture capital favored China for the first time in 2016. China, with $7.7 billion of VC investments, outpaced the U.S., with $6.2 billion in VC investments, according to PitchBook. This success is attributed to three massive transactions: Ant Financial, with a $4.3 billion venture round, the largest in fintech venture history, followed by Lufax.com at $1.2 billion, and JD Finance $1.1 billion. In comparison, the largest VC transaction in the U.S. was healthcare startup Oscar, with a $400 million venture round.
Clearly, fintech is no longer defined by the capital markets of Wall Street, or the tech hub of Silicon Valley. Investors are eager to identify the right regions that are ready for development, the right industries ready for disruption and the right fintech companies ready for an infusion of capital.
- AI, DATA
Once the domain of large institutions with deep pockets, artificial intelligence has been used to gain an edge over the markets, gain insight into consumer behavior, provide more holistic service to clients and create more compelling and competitive offerings. Now, AI is being leveraged by smaller enterprises — including financial advisers, and even consumers themselves.
AI can solve challenges as complex as detecting fraud, mitigating hidden risks and exposing unseen opportunities in an increasingly competitive market where every basis point counts. It is also used for tasks as simple as determining which email you should send to your client, or sorting which content is shown on their social media newsfeed.
Whether leveraged for business intelligence and predictive analytics, or to deliver a smarter, faster more accurate user experience, there is no going back from AI, big data and automated algorithms. And expect to see the next generation of AI go beyond numbers and logic to create an experience that allows room for the human touch and emotional connection that is so highly valued when helping your clients to manage their finances.
Insurtechs have become one of the fastest growing fintech segments as the insurance industry looks for ways to overcome the roadblocks to innovation, from legacy technology systems and complicated underwriting, to complex regulations and strict capital requirements. Insurtech continues its climb on the Fintech100, with 12 insuretech companies topping the list in 2016 — almost double from 2015.
Disruptive insurtechs such as U.S. ventures Oscar and Lemonade, and China's first digital-only insurance provider Zhong An, are making the biggest headlines for challenging the industry norms. But keep your eyes on the insurtech enablers. These companies, which help established incumbents to optimize operations and do business with customers in the manner they prefer, are growing in number — and capturing a growing share of the investment dollars, according to The Fintech Report 2016.
Compliance is often one of the largest expenses for institutions. And it is becoming increasingly burdensome on advisers. As the pace of change races exponentially, it demands adaptable, error-free, real-time monitoring. Regtech is an emerging segment of the fintech industry that is attracting attention and dollars. And regtech is also establishing its presence on the Fintech100, with nine regtech companies topping the list in 2016 — up from 2 in 2015.
Disruption of financial services is not a one-time event. Continuous pressure to innovate is shaped by everything from consumer behavior, advisers' needs, regulatory requirements — and ultimately the demand for greater value. Innovative start-ups continue to capture attention — and capture a significant amount of the available capital from private equity, venture capital and accelerators.
At the same time, many well-established incumbents within the financial services industry will ramp up investments to advance their own innovation — and to compete aggressively with new entrants. And going forward, expect to see greater collaboration between the two. From this perspective, fintech still has tremendous upside.
Advisers have tremendous upside too, especially RIAs and fee-based advisers, the fastest growing segment of the market. Even in an environment that is increasingly commoditized — and competitive — the most successful advisers will leverage the best of fintech to remain relevant and keep pace with the rapid rate of change.