From digital payments to lending technology, here’s everything you need to know about fintech investing and why it may be right for you.
The digitization of the financial industry has accelerated in recent years, and investment in fintech has emerged as an attractive wealth-building opportunity for investors.
In the first half of 2020, global investment in fintech totaled US$25.6 billion, according to KPMG. While that’s a big number, overall investment is down compared to last year, largely due to the impact the COVID-19 pandemic has had on most industries on a global scale.
By comparison, the fintech market saw US$37.9 billion in investment in H1 2019. Aside from the coronavirus, KPMG attributes 2020’s decline to “the lack of mega-M&A deals” seen so far.
Despite the setbacks of 2020, the global fintech market is expected to grow at a compound annual growth rate of around 20 percent between 2020 and 2025, states Research and Markets, and is expected to reach a market value of around US$305 billion in that time.
Growth in venture capital investment, investor interest and private equity investment have all helped fuel innovation and investment in fintech. Read on to learn more about this flourishing market.
Investment in fintech: Global market breakdown
2018 and 2019 were banner years for investment in fintech. These years were marked by a number of major fintech deals that were characterized by their size and geographic diversity.
Many private equity firms took notice during this time and placed their money into fintech. Among others, Blackstone invested US$17 billion in Refinitiv, while P2 Partners and Silver Lake, a global financial technology business, acquired Blackhawk Network for US$3.5 billion.
In 2020, venture capital investment in fintech has been strong across geographic jurisdictions despite global uncertainty. KPMG reported that in the first half of the year, fintech investment from venture capital sources totaled US$9.3 billion in the Americas, US$6.7 billion in the Asia Pacific region and US$4 billion in the European and Middle Eastern region.
Fintech investment in the US is growing at a healthy pace. KPMG notes that “US investors see fintech as a significant growth vehicle.” The payments sector has seen the most venture capital investment in the country for 2020, with Stripe and Chime raising US$850 million and US$700 million, respectively.
More mature companies are also scoring large funding raises, including wealthtech player Robinhood and cryptocurrency company Bakkt at US$430 million and US$300 million, respectively.
Corporate fintech investment in the US reached a record of US$2.4 billion in the first quarter of 2020, almost matching it again in the second quarter. Corporate investment remained high despite the uncertainty, due in part to the predominantly strategic nature of the investments.
US corporations are also investing more in fintech capabilities as a means to support their business strategies. KPMG notes that US banks view fintech investments as an important factor to pay attention to “as they could make some big investments in an effort to accelerate their digital agendas.”
In the Asia Pacific region, it’s tech giants such as Google (NASDAQ:GOOGL), Tencent Holdings (OTC Pink:TCHEY,HKEX:0700) and Facebook (NASDAQ:FB) that are dominating, alongside platforms such as Gojek and Reliance Jio. “The increasing activity of platform players and large tech giants in the fintech space across Asia showcases how the lines between fintech and other sectors are blurring,” states KPMG.
In Europe, venture capital investment in fintech remains strong, although funding remains a challenge for early stage companies. However, the region is experiencing “a major shift away from cash and an uptick in the demand for digital tools, products and services.”
Investment in fintech: Current market status
As the sector continues to mature, a number of trends are characterizing the fintech industry.
For its part, managment consulting firm McKinsey & Company states that four trends are shaping the capital markets infrastructure side of fintech: distributed ledger technology, artificial intelligence (AI) and advanced analytics, quantum computing and post-trade products.
The financial technology sector is advancing in many ways, both locally and internationally, in areas like real estate, peer-to-peer lending, cross-border payments and general lending. Both the wealth management sector and portfolio companies are recognizing the benefits of fintech.
According to the Fintech Growth Syndicate, paytech accounts for the largest segment of the Canadian fintech ecosystem, standing at 25 percent of the industry. A paytech company is defined by Payments Canada as a company that uses technology to enable the electronic transfer of value.
Recently, S&P Global said in a report that “even in the teeth of the pandemic, there has been a steady flow of financial technology mergers over the $1 billion mark.”
The report highlights global credit card networks such as Mastercard (NYSE:MA) and Visa (NYSE:V) as important drivers of this activity. “Mastercard and its peers are using fintech acquisitions as a way to reinvent themselves and to signal to the market that they are more than just a set of payment rails, industry observers say,” states the firm.
Visa started off 2020 with a US$4.9 billion cash acquisition of California-based Plaid, which provides application programming interfaces (APIs) that are central to open banking technology. In mid-2020, Mastercard bought API specialist Finicity for US$985 million.
Investment in fintech: How to start
If you’re serious about making an investment in fintech, there are a number of ways to step into the sector, including exchange-traded funds (ETFs) and stocks.
ETFs provide exposure to multiple companies at once. Fintech-focused options included:
- The Global X FinTech Thematic ETF (NASDAQ:FINX) was launched in September 2016; contrary to its name, it is primarily focused on US companies.
- The Ecofin Digital Payments Infrastructure Fund (CBOE:TPAY) began trading in February 2019 and contains companies that are focused on the digital payment sector. It tracks the Tortoise Global Digital Payments Infrastructure Index.
Fintech companies are popping up left, right and center, and it might be overwhelming for some investors. As a starting point, click here to check out our list of 12 Canadian fintech stocks.
Whichever investing path you choose, it’s clear the fintech sector has grown considerably in recent years as more private equity and fintech investors enter the space. Companies continue to innovate in finance and ultimately the capital markets. The industry looks likely to keep expanding in the future.
This is an updated version of an article originally published by the Investing News Network in 2016.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.