Why investors are actively funding fintech projects?
Over the past couple of years, fintech companies have begun to receive a large influx of investment. It’s not only about Western Europe and the United States, although their trends are much easier to follow. For example, in 2018 American fintech startups attracted almost $12 billion from venture capital firms. This is 120% more than in 2017 ($ 8.1 billion). In 2016, total investment was $ 5.9 billion. How do you like this positive dynamic? These are mainly interesting innovative projects, which create a simple solution for a complex payment problem, or a trend topic.
An indirect consequence of this process is they are ready to pour more money into fintech: both in terms of amounts and in the number of applicants. Often there are large banks among the investors — for obvious reasons, which I have mentioned more than once, for banks this is a chance to reduce the technical gap in the payment services sector and maintain their status quo.
However, the largest ones prefer to create in-house solutions. Somewhere successful, somewhere not. A vivid example of the distinction between partnership from internal development is Monobank brand, created by the Fintech Band team for Universal Bank, and Privat24, whose e-business center provides internal development and modernization of Privat24.
For markets with an insufficiently developed legal framework, the main reason will be compliance with regulatory requirements — many fintech projects are becoming more complex and similar to banks, and, therefore, they are under more and more pressure on the requirements of banking legislation.
But let’s back to the investment. In the 4th quarter of 2018 there were 10 investment rounds t. Thanks to him, several fintech companies have become “unicorns”. For example, a startup Plaid, founded in 2013 as a powerful personal finance tool that allows you to manage accounts of all banks in one application. Convenient and profitable. I won’t say what banking application in Ukraine goes to this, you already know.
In 2018, the number of investors in the industry increased by 18%. Most often, money is invested in new promising payment methods, in their implementation to specific software and in updating the payment infrastructure. The outcome of business in digital commerce (the term is the successor of e-commerce as an outdated concept) is in full swing, because investment projects answer the questions “With what do people pay?” And “How do people pay?”.
At the same time, some investors have a misunderstanding of the root causes of why all this. They act according to the principle «everyone goes there — well, and I will go too». This can be considered as another sign of the transition of financial services from the pioneering stage to active saturation.
The question of whether banks should be sources of fintech innovations or whether they should invest in such projects and create collaborations, is very controversial. It seems to me that there is no right answer to it, because everything depends on the market conditions. For the United States, with their long-established pattern of non-cash consumption, big banks are as conservative as possible because they don’t have to fight for the customer, and budgets allow them to invest in startups and don’t spend resources on what banks has lack in competence. In the case of Ukraine, banks are forced to become centers of innovation, because legally they can do much more than non-bank financial institutions. They are often responsible for the financial and legal aspects of the work of Ukrainian fintech companies (as is the case with our «Leogaming Pay» financial company).
In any case, banks have more levers of compliance with regulatory requirements, and fintech-startups are a story about “creativity”, maximum mobility and the creation of a something new.
The «first wave» of fintech projects created a precedent and found customers for financial services where they were not been before. This has become interesting for traditional players of the financial market. But the «first wave» is over, and chaotic investments in startups in the early stages are also in the past.
Now, at an early stage there is properly targeted «sowing» of investments is underway, which makes it possible to bring an interesting project to the level of a stable MVP. Thus, paradoxically, although investors see more opportunities than ever, they focus on fewer deals with companies that have real breakthrough potential and unique value propositions.
That’s where the growth of interest comes from — everyone wants to create a «new Revolut / Monzo / Plaid / Monobank» (underline the right one), and this is a sign that everything is more than in ok with the investment market. The quality bar is growing — the level of the whole industry either.