Will 2019 Be Another Banner Year for FinTech?

2018 was a blockbuster year for FinTech. Over $22 billion in investment deals were done – an increase of nearly 24 percent from 2017. It looks like 2019 will be no different as the sector is already starting off with a bang.

On January 8, 2019, FinTech start-up Plaid announced they’ll purchase competitor, Quovo, for $200 million in its first major deal. Plaid’s technology provides an application program interface (API) that connects bank accounts to FinTech apps like Venmo, Robinhood, Coinbase, and Acorns. As of December 2018, San Francisco-based Plaid said 25 percent of Americans with bank accounts connected to Plaid through an app. What’s more, Plaid recently raised $250 million at a $2.7 billion valuation and added Kleiner Perkins partner Mary Meeker to its board.

The most telling example of the growing investment into FinTech came from Warren Buffet’s, a.k.a the “Oracle of Omaha,” investment the industry. In 2018, the Berkshire Hathaway conglomerate — led by one of Berkshire’s top money managers, Todd Combs — invested roughly $600 million in two FinTech companies (Paytm and StoneCo) that are focused on emerging markets, according to the Wall Street Journal.

Berkshire invested $300 million in Paytm, India’s largest mobile payments service, and another $300 million in StoneCo, one of Brazil’s leading payment processors. Their investment marks a bellwether of change since Berkshire Hathaway is known for investments in distribution companies, such as supply chain (McLane), insurance (Geico), railroad (Burlington Northern Santa Fe, LLC) and utilities (PacifiCorp) — typical all-American, apple pie, tried-and-true companies.

Additionally, Buffet has traditionally had an aversion to tech, but his holding changed back in 2016 with the investment into Apple – becoming its second largest shareholder. Berkshire stayed away from early-stage tech players, but these FinTech companies dominated their respective local markets, which is a theme that fits with Buffett’s past investment criteria. It also helps that Combs was focused on payments companies at his former hedge fund Castle Point.

FinTech Finds Its Footing but Deal Activity Remains Slow

The global FinTech sector raised $41.7 billion in the first half of 2018, surpassing last year’s record total.

Global FinTech investments increased steadily from $19.9 billion in 2014 to $39.4 billion in 2017 at a compound annual growth rate (CAGR) of 18.5 percent. The trend accelerated in the first half of 2018 when $41.7 billion was invested across 789 deals.

There were two megadeals valued above $1 billion in the first half of the year including a mammoth $14 billion investment in Ant Financial, the payments affiliate of China’s Alibaba Group. 

Temasek Holdings and GIC led the Series C round with co-investment from Sequoia Capital and Warburg Pincus, among others. The deal accounted for a third of the total capital raised during the first half of the year.

However, even though there were significant deals in the FinTech space, deal activity was not as robust as it was in 2015 when there were a total of 2,251 deals. Deal activity has been trending downward since then and is set to continue in 2018, with the 789 deals completed which is only 43.9 percent of last year’s total.

The global FinTech sector raised $41.7 billion in the first half of 2018, surpassing last year’s record total

  • Capital raised in Q2 2018 surged to reach a record of $32.2 billion. This represents an increase of 3.2x compared to Q2 2017. 
  • Even when the two megadeals valued over $1 billion are disregarded, Q2 2018 still remains the strongest funding quarter to date.
  • Despite the high-funding total, deal activity was historically low at just 381 deals. This is the second-lowest value recorded between 2014 and Q2 2018.
  • This resulted in the average deal size, excluding megadeals, jumping from $26.5 million in Q1 2018 to $41.5 million in Q2 2018.
  • There was a significant shift towards larger investments between 2014 and 2017. Deals valued below $1 million decreased in share from 41 percent to 15.7 percent over this period. This trend continued in H1 2018 when 3.4 percent of all deals were in the sub-$1 million category.
  • Conversely, deals valued above $20 million increased in share from 12.1 percent in 2014 to 23.6 percent in 2017. In the first half of 2018, this figure jumped to 38.3 percent.
  • The pattern of fewer, larger deals indicates that the global FinTech market is maturing at a fast pace.
  • Notably, the Marketplace Lending sector has the lowest proportion of deals valued less than $1 million at 20.4 percent. It also has the highest proportion of large deals, with a third of all investments in the sector valued above $20 million.

The top 10 FinTech deals in H1 raised almost $22 billion

  • The aggregate of the top 10 FinTech deals in the first half of 2018 is $21.8 billion, which equates to 52.3 percent of the total capital raised during this period.
  • The largest deal in H1 2018 was the $14 billion investment in Ant Financial, followed by a $4 billion funding round raised by Block.one — an end-to-end blockchain solutions provider — in the largest initial coin offering (ICO) to date.
  • SenseTime, a Beijing-based provider of facial-recognition technology, features twice in the top 10. The company initially raised $600 million in a Series C round led by Alibaba Group. The funding round was followed by an additional $620 million in Series C+ funding — led by Tiger Global Management, Silver Lake Partners, Fidelity International and HOPU. The funding will be used towards research and development, as well as hiring talented researchers.

So what does this mean for early-stage and late-stage FinTech startups? It’s clear there is money out there and large investors see the value and are making substantial bets into FinTech. Recent acquisitions seem to bear this out with Fintech. Over five years, 18 FinTech were acquired by big banks — six of those acquisitions occurred from September 2017 to September 2018. 

There is still a lot of room to grow with more than 12 percent, or 35 of the top 300 global unicorns (valued at $1 billion or more) recognized as FinTech. The technology transformation shaping our world, was characterized as the 4th Industrial Revolution, conceptualized by Klaus Schwab, well it has finally taken root in the Financial Sector.

Many banks are still trying to spark their own digital revolution. However, the major players have realized acquisition is faster. In 2018, 80 percent of top 50 banks had not made a FinTech acquisition, but maybe 2019 will change that.

We don’t know what 2019 will hold, but the tea leaves hint to more acquisitions in FinTech. Headwinds, such as the government gridlock, global market volatility, rising rates, slowing cash investments, and customer demand will call for executives and investors to begin to make some difficult decisions. 

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The data for this research was taken from the FinTech Global database. More in-depth data and analytics on investments and companies across all FinTech sectors and regions around the world are available to subscribers of FinTech Global. ©2018 FinTech