Who, what and why: a guide to the fintech revolution
Start-ups are giving people new ways to handle their money, and large companies are eyeing their large customer bases
Few industry combinations are as alluring to investors as finance and technology. For the past decade fintech start-ups have offered new ways to help people handle money. As start-ups face more competition from tech giants and deep-pocketed banks, investors are turning their attention to fintech in new markets. Here’s a look at some of the developments and trends that are driving the industry today.
Gold rush abroad
Mobile phones are transforming finance. While most Bloomberg Markets readers have a mobile phone and a bank account – and perhaps a bank app on their phone – millions of people around the world have the phone but no bank. These underbanked markets, led by countries in Asia and Africa, have inspired fintech innovation that’s leapfrogging the technology available in the developed world. The sheer number of potential customers doesn’t ensure success, however. The winners are the companies that have devised business models that can profit in less developed markets, or that expand to serve wealthier customers. Ant Financial Services Group’s Alipay and Tencent Holdings’s WeChat Pay in China, Paytm in India, and Safaricom’s M-Pesa in Kenya are some well-known examples.
Facebook’s plan to bring cryptocurrency to the masses
Fintech innovation is no longer dominated by scrappy start-ups — big tech companies are getting involved. Take Facebook’s plan to launch a digital currency called Libra in 2020. The social network’s gigantic reach — more than 2.4-billion active monthly users — could draw a much wider audience to Libra than has used previous cryptocurrencies. For instance, global remittances by migrants reached a record $689bn in 2018, according to the World Bank. If Libra tapped into even a portion of that, the potential would be huge. So far, policymakers in the US and other major economies are resisting the tech giant’s plan, which could undermine their monetary authority. In August, Bank of England governor Mark Carney suggested that central bankers could create a digital currency themselves.
Who’s funding the revolution?
Start-ups in almost every sector have benefited from a surge in venture capital (VC) investment. Fintech is no exception. North America holds the top spot in terms of dollars spent. Some VC firms are making multiple bets on fintech. San Francisco-based 500 Startups staked 43 such companies in the 12 months ended June 30. Some manage funds that specialise in particular areas, such as Andreessen Horowitz’s crypto-focused a16z.
Where the biggest fintechs live
North America, with the most venture capital, is also home to many of the hottest fintechs. Payments start-up Stripe’s $35bn valuation exceeds that of more than half of the S& P 500’s members. Cryptocurrency platform Coinbase, free trading app Robinhood Financial, digital bank Social Finance, and credit score platform Credit Karma are each valued at $4bn or more.
In the second quarter, India — home of mobile payments start-up Paytm — surpassed China in the number of deals. But China still has the most valuable fintech. Lu.com, the wealth management platform backed by Ping An Insurance (Group), was most recently valued at $39bn.
In Europe and Latin America, 2018 and the first half of 2019 have been good to the digital banks raising new capital. OakNorth, Monzo and Revolut in the UK, N26 in Germany, and Nubank in Brazil are among the most valuable fintechs in those regions.
For Wall Street, it’s innovation by acquisition
As of August, US banks had already made 24 fintech investments in 2019. The most active were Goldman Sachs, Citigroup and JPMorgan Chase. Each has looked at deals with start-ups in a variety of areas, including consumer-facing personal finance applications and data analytics and aggregation capabilities that are deep in the back office. Payments and the capital markets business have driven a lot of the investment by these banks.
Rival banks don’t often invest in the same companies, but in the fintech space it’s not unheard of. Digital Asset Holdings, a blockchain start-up, is backed by all three, for instance, while Plaid, which connects bank customers’ data to third-party finance apps, is backed by Goldman and Citigroup. In 2018, Goldman acquired Clarity Money, a personal finance website in which Citigroup had previously invested.
Some will go public, others will evolve. Here’s a list of private fintech companies to keep tabs on in 2020.
• Stripe — Likely to pursue an initial public offering, joining other payments companies among the most highly valued fintechs. Stripe’s founders are Ireland’s richest entrepreneurs.
• Credit Karma — A key question for this credit monitoring service is how many of its more than 30-million weekly users are actually applying for credit cards on the site.
• Nubank — This Brazilian challenger bank has raised almost $1bn since its founding in 2013. Now it has a $10bn valuation and has expanded into Mexico.
• Plaid — You may not have heard of it, but chances are you’ve used it. Plaid helps send information from your bank to any app or service that needs it (think Venmo). Banks don’t love it, but customers do.
• Robinhood — The free trading app’s cheque account idea ran afoul of regulators in 2018. It’s since raised more funding and launched a new version, this time after working more closely with DC.
Silicon Valley Has a seat at the table
It’s not just Facebook. Most big tech companies have started dipping their toes into finance. They’ve been strategic, picking businesses that are subject to less regulatory scrutiny than banking and leveraging partnerships with banks. Apple teamed up with Goldman Sachs Group on a new credit card and worked with a variety of banks on Apple Pay. Facebook has had dozens of partners to help with Libra, including Visa. Amazon.com lends millions of dollars to sellers on its platform each month — always through partnerships with banks. Sense a trend?
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