Fintech is at a turning point. As the world grows increasingly reliant on digital currencies for their day-to-day transactions and less on fiat currencies, there has never been a greater demand for streamlining financial services. This poses a massive opportunity for entrepreneurs and investors alike.
However, the numbers aren’t adding up. In 2020, funding for fintech has slowed down and markets have grown less active than previous years. McKinsey reports that after growing by 25% annually since 2014, the fintech market slowed down by 11% worldwide in the first half of 2020.
Given the current economic climate, incubators, accelerators, and VCs have a greater responsibility to support innovative fintech startups to grow and for industry-disrupting technologies to come into the spotlight in 2021.
The Shape of Fintech to Come
Michael Cavanaugh, founder of consulting firm Fintech Ranger and Regiment Investment Bank, says that fintech companies seeking to replace legacy systems have huge potential. After having his hand in a number of fintech firms over the years, he says he truly believes that “technology that enhances speed, accuracy and security in payments will prove to be big winners,” Michael says.
He also leads Fintech Ranger’s capital raise arm, Regiment. Regiment provides investors and entrepreneurs a platform to connect to close investments via a technology enabled, trusted source. Michael believes companies that seek to create innovative alternatives like Regiment are at the forefront of an ongoing revolution in the financial services industry. Michael explains:
“We believe blockchain and digital assets are the next generation of technology that wins in payments. Ask any open outcry floor trader from the late ‘90s if technology can disrupt an industry. There is no doubt that we are witnessing a full-blown digital transformation and global shift in trading, investing, and the way we transact financially.”
The problem, however, is that the digital assets revolution is currently running sluggishly.
Turbulence in 2020 Funding
The same phenomenon can be seen across other industries. According to PitchBook and NVCA’s Venture Monitor, VC deal activity has generally slowed in Q2 of this year by 23.2% from the first quarter, down to $34.3 billion across 2,197 deals.
This means that the slowing down can’t be attributed to a decline in interest in fintech, but rather because of the ongoing pandemic. It’s been said countless times in numerous reports, but funding across almost all industries are running into slight hiccups in 2020 from otherwise upwards trajectories.
High Hopes for the New Year
While the ongoing pandemic has impacted funding everywhere, BDO’s September Private Capital Pulse Survey revealed that 74.5% of fund managers surveyed have high hopes for the economy next year, with 28% expecting it to be “much better” and 46.5% “slightly better.” This includes funding in fintech.
“As cryptocurrencies gain more traction and market cap, fiat currencies will weaken, more utility and adoption will occur, and with time all of the paper money we own will be worth less and less,” Michael says. It’s only a matter of time before fintech funding gets back on its feet in 2021 and comes into full force, possibly stronger than ever.
3 Innovative Fintech Services VCs Need to Watch Out for
Market Screener reports that the fintech sector is bound to reach US$26.5 trillion in 2022. For a sector that was virtually unheard of a decade ago, it’s become one of the most profitable and fastest-growing industries in the market. We list here some of the most popular fintech services that VCs have to look out for.
Invest-techs are a core driver of innovation in investment management. Investors and investment management firms are embracing invest-techs because of the variety of solutions they offer. The future of invest-techs has huge potential, with overall funding touching a record high of $2.8 billion in 2018.
One product of invest-tech is robo-advisers. Robo-advisors provide digital financial advice derived from mathematical algorithms and by far, they are the most popular invest-tech. Companies developing this technology reached their peak in the mid-2010s, but most of them have drifted off today.
Mobile wallets basically allow you to make payments through an app on your phone. They allow you to store your card and bank details on your mobile device and essentially eliminate the need for physical cash, making payments much more efficient and bills doable from the comfort of your home. Some of the most popular mobile wallet apps right now in the U.S. are Apple Pay and Google Pay.
Digital Share Brokers
Digital Share Brokers provide a platform for newer investors to understand the basics of stock trading and trade on the floor with minimal risk. These are a great way for first-time investors to learn the tricks of the trade, making investing significantly more accessible across all industries.
The most popular examples of these are Freetrade and the Robinhood stock trading app. Investors have been pouring serious money into them, with some turning into unicorns like the Switz fintech company Numbrs.
Given the steadily growing demand for digital financial services worldwide, there has never been a more opportune time to invest in fintech. All of this is taking off in 2021, and VCs have to be ready for it.
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