Fintech Market Update: Q1 2019 in Review

2018 was a noteworthy year in the fintech sector with US$40 billion exchanged in 1,700 deals, an increase of 15 percent from 2017. Fintech has continued to evolve over Q1 2019, with notable advancements seen in digital banks, payment solutions and compliance to name a few.

The regulatory environment on a global scale was conducive to these advancements. Because regulators want fewer banking monopolies, they have been lowering the barriers for tech startups entering the market to increase competition, according to a report by CB Insights.

For example, in March, the Hong Kong Monetary Authority issued its first digital banking licenses. Perhaps surprisingly, Tencent Holdings (HKEX:0700) and Alibaba (NYSE:BABA) were absent from the first stage of approvals. Standard Chartered (HKEX:2888), ZhongAn Online P&C Insurance (HKEX:6060) and Livi VB were granted the approvals. Livi VB is a joint venture between the Bank of China (OTC Pink:BACHY), JD.com (NASDAQ:JD) and Jardine Matheson (SGX:J36).

“Fintech startups that want to replace the old guard of banking are leveraging regulatory tailwinds and applying for charters and licenses with respective regulators,” CB Insights notes in the report.

Canadian regulators are following suit. The finance department sought out stakeholders for consultation on open banking in January to examine the role of the fintech sector in terms of innovation and to discover how to bolster its competitive advantage on a global scale. 

Open banking is a framework in which businesses and consumers can allow third party financial service providers to use secure online channels to access their financial transaction data. The merits of open banking were included in the 2018 federal budget.

With many shifts underway in the fintech space to start the year, here the Investing News Network (INN) looks back at the major trends within the sector in Q1 and what’s ahead moving into Q2.

Fintech market update: Q1 2019 highlights

Security was a central trend seen over the last quarter, as client payment and financial data entered into a number of different fintech platforms.

“One of the interesting things we are seeing is a trend towards increasing the security of digital currency transactions and wallets, which is driving investment and interest in that sector, particularly last quarter,” Ellis Odynn, executive director and chief artificial intelligence (AI) officer at the Digital Finance Institute, told INN.

In a report by Payments Canada and Leger Marketing, 50 percent of 1,507 respondents said that the arrival of e-wallets makes them “somewhat” to “very” anxious, while a greater percentage were more anxious about self-driving cars and AI.

“Most financial services companies are looking at predictive AI for a range of services, from client acquisition to select services, and we saw that there was investment flowing into predictive AI solutions for fintech,” Odynn said regarding AI being further integrated into fintech.

Venture capital funding for women is another trend seen over the last quarter.“There’s a lot more invested than we have seen. This includes Roar Ventures, started by Peggy Van De Plassche, a former banker at CIBC (TSX:CM). Her whole idea was having women run venture capital funds,” Odynn said.

Research has shown that businesses led by women of color have had superior success rates, despite not receiving as much venture capital funding, Odynn further noted.

Similarly, Harvard Business Review reported that in the US, 8 percent of venture capital firms have women partners, while women-led firms reported higher rates of return versus their male counterparts.

Meanwhile, a larger scale database on the Canadian fintech industry has been developed by the FinTech Growth Syndicate.

Surinderjit Bhatti, Innovation Lead at the FinTech Growth Syndicate, told INN that the firm has one of the most comprehensive databases of more than 1,100 fintech companies in Canada, with PayTech being the largest sector, followed by FI Tech & Software and LendTech. A PayTech company is defined by Payments Canada as a business that uses technology to enable the electronic transfer of value.

“As the fintech space is maturing in the country, there has been a new wave of rebundling. Wherein fintechs that have done particularly well in their vertical are moving to other verticals to offer a full gamut of financial services to their customers,” said Surinderjit. “Wealthsimple, which started as a robo-advisory, has now started offering saving accounts to its customers. SoFi in the US, which started as a student loans company, is now offering mortgages, investment and insurance products.”

As the industry offers more products and services, fintech shows few signs of slowing down. CB Insights reports that the growth of the fintech industry grew at a healthy clip in 2018, with a 120 percent increase in venture capital funding alone.

Fintech market update: Beyond Q1 2019

As China leads the fintech sphere, with Ant Financial raising US$14 billion in June 2018 and WeChat Pay being used by over 600 million individuals monthly, other countries are furthering fintech adoption into apps and services, although not to the same scale.

“In China, the fintech applications are so integrated — mostly on WeChat — and I expect we will start to see that type of broad and deep integration in Canada and elsewhere where fintech solutions are built into our everyday apps more readily,” Odynn told INN.

While funding in China and Europe was dominant in fintech over the past quarter, Canada still experienced some notable financing rounds, with over C$5 million in financing for Toronto-based Finaeo and C$1.5 million in funding for cross-border payments company Buckzy, for example.

In the US, Odynn notes that traditional financial institutions have invested in fintech companies, continuing to support the ecosystem.

According to KPMG, consolidation in fintech is anticipated to rise, especially in blockchain, payments and lending. It further expects that deals will grow in size, with venture capital firms favoring late-stage enterprises that decrease risk.

In addition, an uptick in global growth is predicted for fintech firms. “The national boundaries for fintech will blur. Companies like Funding Circle and Revolut are entering Canada, PayTm has already established its base here” said Surinderjit.

In March, US-based firm Plaid began providing extended institution services in Canada, allowing customers to use the Plaid app to link with several credit unions and banks, including TD (TSX:TD), BMO (TSX:BMO), RBC (TSX:RY) and Scotiabank (TSX:BNS). Bhatti notes that the government of Canada is inviting new talent from overseas into tech companies.

Additionally, bigger financial institutions will invest larger sums of money into fintech. “Banks are investing a lot in their in-house fintech solutions,” Surinderjit further noted.

What’s more, non-fintech companies are continuing to enter this space, as Apple’s (NASDAQ:AAPL) Apple Pay hit 10 billion transactions in 2019 and as Amazon (NASDAQ:AMZN) announced its new healthcare insurance platform, Haven, in March in partnership with Berkshire Hathaway (NYSE:BRKA) and JPMorgan Chase (NYSE:JPM).

Surinderjit explained that having a fintech product allows the tech giants to provide their customers with a more comprehensive and streamlined experience.

Fintech market update: Investor takeaway

In March, Barron’s noted that fintech company MTrac is well positioned for superior growth after entering the new markets of Hawaii and Oregon. MTrac provides software services such as a payment platform, e-wallet, compliance and blockchain. MTrac is a subsidiary of Global Payout (OTC Pink:GOHE).

Another highlight includes Haywood Securities recently boosting its rating of Canadian firm VersaPay (TSXV:VPY) from hold to buy. Haywood Securities gave the company a C$2 price target, forecasting impressive 93 percent revenue growth throughout 2019. Versapay provides software-as-a-service for companies’ accounts receivables. RBC, Intuit (NASDAQ:INTU) and McLeod Software are among its clients.

Putting it simply, fintech continues to make strides. American Banker predicts that 2019 will see AI and machine learning at the helm. Back-end developments in AI and fintech have applications such as virtual assistants, client risk algorithms and document digitizing through optical character recognition. 

The first quarter of 2019 witnessed a steady pace of fintech advancements in security, payments, bundling and global growth coupled with the development of regulatory systems that appear to support them. Moving ahead in the year, the impact of fintech continues to face the old guard while aiming to shift existing monopolies.

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

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.