It’s 2020, and VCs are mad about fintech-related startups.
Pitchbook reports that in 2018, the financial technology industry in America and Europe alone drew more than 1,300 venture deals totalling more than $15 billion. KPMG’s estimate for the global market, meanwhile, is up at $52 billion. Even newer VCs have also poured billions of dollars into fintech deals, attracted by the promise of high returns. Altogether, these combined efforts birthed at least 41 fintech unicorns in 2019 alone.
What does this mean for everyone else? As more investing dollars find their way into finance startups, how is the resulting transformation impacting the daily lives of consumers? We list some of the areas of innovation here.
The ‘Unicorn’ Sectors of the Fintech Market
Five key sectors capture more than 60% of the total investment made by both VCs and traditional funders:
Peer-to-peer (P2P) lending goes head to head with traditional financial institutions, as it takes up one of their important functions: managing loans.
As the label denotes, P2P lending offers an alternative form of financing, which allows direct contact with potential investors. By practically removing the middleman (i.e., banks and traditional lenders), borrowers have a greater chance of getting the credit application approved, without the usual hassle and also at a much lower cost.
These are just some of the P2P lenders that are fueling innovation among startups, by giving them the necessary funding to get their projects going:
Online Payment Processing
Global e-commerce sales will grow further in 2020, estimated to pass $4 trillion, and with it, demand for online payment facilities. Besides the usual debit or credit cards, some newer and more innovative mediums of cross-border transfer will be available, as well.
The potential for return is enormous, plus the barriers to entry are relatively low, as evidenced by the success of these known brands:
Global remittances were estimated at $530 billion as far back as 2017, and it’s shown no signs of slowing down. The sector’s strong and steady increase – what with expanding globalization and in turn diaspora – can be attributed to decreasing payment transfer costs across borders, and especially with developing countries.
For a startup to penetrate this market, the key is to be able to enable consumers to make large fund transfers at a fraction of the cost in banking institutions. TransferWise, one of the biggest fintech remittance companies, is currently handling over $500 million monthly in remittances and has been able to secure further $280 million in funding.
Today, 1.7 billion people remain unbanked; but 5 billion own mobile phones. This presents a massive opportunity to utilize gadgets as a means to acquire financial access, and for startups, an exciting market in which to participate. A related channel to online payment processing, mobile wallets have attracted their own share of investments, since handheld devices have become ubiquitous, even in developing economies.
Last year’s global estimates projected mobile wallet users at 2.1 billion, making payments and sending funds. This has appealed to more than a few corporate giants, giving rise to startups like Dwolla and Mozido.
Security Analysis and Fraud Tracking
Applications of machine learning and artificial intelligence are now more commonplace than ever before. Using such technologies, fintech startups are able to take large amounts of data, process them to analyze trends in financial transactions, and spot cases of fraud.
One of the top performers here is Featurespace, which is being used in over 180 countries worldwide. Brighterion is another rising star offering similar services. More startups and investors are likely to dip into this market, as merchants are expected to spend $9.3 million on fraud detection and security by 2022.
Opportunities abound in the financial sector, from technology innovations to capital markets. Fintech is seen to continue on its growth trajectory, especially in the five focus areas highlighted here, drawing interest from private equity and fintech investors alike. Let’s have a chat, if you’re considering early stage fintech startups for your investing portfolio.