Fintech Funding Influx Fuels Excitement, Raises Concerns

Despite a lackluster end-of-the-year period, market watchers at Canaccord Genuity are encouraged about the fintech industry thanks to a critical 2019.

In a note sent to investors on Monday (February 3), analyst Joseph Vafi and associate Pallav Saini said private fintech funding more than doubled last year compared to 2018, generating an estimated US$16.7 billion throughout 2019, up from US$7.2 billion raised in the previous year.

All this funding was done despite the fact that only US$2.7 billion was raised in Q4 of last year, a significant drop from US$5.5 billion in Q3 and US$5.3 billion in Q2.

“Following the torrid pace of transaction volume in Q2 and Q3 of last year, private company financings in fintech slowed some in the December quarter, although we nevertheless note several transactions,” the pair wrote in the missive.

Fintech, short for financial technology, refers to tech aiming to revolutionize traditional methods of financing. It includes everything from mobile banking to digital investment services.

Vafi and Saini added that Q2 and Q3 were “blockbuster quarters” when it came to private company financings, and noted that a year-to-year outlook gives a better sense of the industry as a whole.

Overall in 2019, there were almost 50 transactions valued at US$100 million or more, which is an upgrade from the nearly 30 deals at that price point signed in 2018, according to the Canaccord analysts.

The same sentiment is shared by Dana Stalder and Jake Jolis from Matrix Partners. In a TechCrunch article, the pair said 2019 was marked by “monster growth,” mentioning the win for public fintech company PayPal (NASDAQ:PYPL), which gained US$26 billion in market capitalization.

The Canaccord analysts said the success story for fintech in 2019 represents a larger movement to disrupt traditional means of payment and investment.

In fact, the analysts warned that legacy financial services need to tread carefully as innovative financial tools become more commonplace.

“We continue to believe that banks, brokerages and traditional insurance providers all have to be worried,” they said. ”Furthermore, given the momentum behind some of the larger private companies, we think we could see similar cartel style moves unfolding in 2020.”

Despite the slowdown in Q4, the last part of 2019 was marked with several rounds of funding that resulted in massive gains.

Chime, a US-based branchless digital bank, was able to get its hands on US$500 million in a Series E funding round December, quadrupling its value to US$5.8 billion from a valuation of US$1.5 billion in March last year, according to CNBC.

Another large chunk of funding was secured by Next Insurance, a California-based online insurance provider serving small businesses.

The firm raised US$250 million and became a “unicorn” — a startup company worth over US$1 billion — in the process, the analysts said.

While the Canaccord pair are excited about the developments of 2019, they are closely watching out for oversaturation within a sector that’s been defined so far by impressive balance sheets.

Vafi and Saini said they’re keeping a lookout for a possible “race to the bottom” as the influx of private funding being used across the space could deteriorate the economics of the fintech landscape.

“Consumers are looking for more value for free than ever before, and they are more willing to churn on and off to continue receiving more for less,” they said, adding that as of right now, investment seems to be on the up and hasn’t been dragged down by much investment pullback.

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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.