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 2021, global investment in fintech totaled US$210 billion, according to KPMG. “Expansion” is the key word the firm used to describe the fintech market for the year, as that figure was double the investment seen in the previous year.
Looking forward, the global fintech market is anticipated to grow at a compound annual growth rate (CAGR) of around 19.8 percent between 2022 and 2028, states Vantage Markets Research, and it is expected to reach a market value of around US$332.5 billion in that time.
Growth in venture capital (VC) 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
Since 2018, investment in fintech has skyrocketed, bolstered by a number of major fintech deals that were characterized by their size and geographic diversity.
Many private equity firms have taken notice of this emerging technology in recent years 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 2021, venture capital investment in fintech was strong despite global uncertainty. In fact, KPMG reported that fintech investment from venture capital sources totaled a record US$115 billion, pushing well past the previous record high of US$53.2 billion in venture capital investment reached in 2018.
The crypto, blockchain and buy-now-pay-later (BNPL) sectors saw the most venture capital investment in 2021. Investment in crypto and blockchain based fintech rose from US$5.4 billion in 2020 to over US$30 billion last year. BNPL companies attracted large deals across jurisdictions. Some of those highlighted by KPMG include Klarna’s US$1.2 billion VC raise, PayPal’s (NASDAQ:PYPL)US$2.7 billion acquisition of Japan-based Paidy and Block’s (formerly Square) (NYSE:SQ) US$29 billion acquisition of Australia-based Afterpay.
Corporate participation in venture investment remained high in 2021, due in part to the strategic nature of these investments. Corporate investment in fintech came to US$50 billion globally during the period.
In terms of jurisdictions, the Americas attracted the most fintech investment, accounting for half of the global total, or US$105 billion. In terms of venture capital investment, seven funding rounds exceeded US$1 billion in 2021, all of which occurred in the Americas. These include a US$2 billion raise by US-based Generate and a US$1.1 billion raise by US-based Chime.
US corporations are also investing more in fintech capabilities as a means to support their business strategies. KPMG notes that the sector is marked by a “growing number of corporates and fintechs looking to leverage AI and machine learning across all fintech subsectors, including B2B, cybersecurity, and insurtech."
In the Asia Pacific region, fintech investment reached US$27.5 billion — almost twice that of 2020 — across a record 1,165 deals. KPMG notes that in this region “banks are increasingly looking for assistance to improve their embedded finance, digital wallet, and supply chain finance capabilities.” Backend-as-a-solution technology is also gaining increasing interest from banks and startups.
In Europe, fintech investment also hit a record high, coming in at US$77 billion for 2021. This figure was due in large part to merger and acquisition activity, such as the US$14.8 billion acquisition of Refinitiv by the London Stock Exchange and the US$1 billion funding round of BNPL specialist Klarna.
Investment in fintech: Current market status
As the sector continues to mature, a number of trends are characterizing the fintech industry.
The financial technology sector is advancing in many ways, both locally and internationally, in areas like real estate, peer-to-peer lending, auto financing and general lending. Both the wealth management sector and portfolio companies are recognizing the benefits of fintech.
Forbes recently identified several key trends shaping the infrastructure side of fintech: embedded finance, blockchain technology, cross-border e-commerce, super app platforms, artificial intelligence (AI) and machine learning.
BNPL options are a growing component of embedded finance; the businesses allow consumers purchasing through merchants to pay most often in four small payments instead of one large immediate one. Transactions in this sector of the fintech market are expected to reach US$680 billion by 2025.
More and more financial institutions are embracing the efficiency and security of blockchain-as-a-service solutions. A number of firms, including Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS), are applying cryptocurrency and blockchain technology to their operations.
Cross-border e-commerce involves selling across a border using an online platform between a retailer and a consumer (B2C), between businesses (B2B) or between two individuals (C2C).
Vantage Market Research has forecast that the cross-border B2C market has the potential to grow at a CAGR of 25.1 percent between 2022 and 2028 to reach a value of US$3.4 billion. The Asia Pacific region is expected to dominate in this segment.
Super apps are another burgeoning fintech sector. Forbes notes that super apps “offer vast and diverse suites of services and products from one platform.” Like the brick-and-mortar super stores with retail, grocery, hair salons, restaurants, banking and mobile phone services all under one roof, super apps aim to keep customers locked into their platform by offering to fulfil as many consumer needs as possible. Examples of super apps include WeChat and AliPay.
Fintech companies are harnessing the power of AI and machine learning to analyze data and provide insights that serve to benefit both businesses and consumers.
“AI and machine learning have benefited banks and fintech, as they can process vast amounts of information about customers,” according to a report by Mordor Intelligence. “This data and information are then compared to obtain results about suitable services/products that customers want, which has aided primarily in developing customer relations.” The market research firm predicts the AI in fintech market could grow by a CAGR of 23.17 percent between 2021 and 2026 to top US$26.67 billion.
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 include:
The Global X FinTech Thematic ETF (NASDAQ:FINX) was launched in September 2016; contrary to its name, 65 percent of its holdings are US companies.
The ARK Fintech Innovation ETF (ARCA:ARKF) launched in early 2019. The fund’s stated goal is to capture “the introduction of a technologically enabled new product or service that potentially changes the way the financial sector works.”
ETFMG Prime Mobile Payments ETF (ARCA:IPAY) launched in 2015 and focuses solely on mobile payments stocks.
The Ecofin Digital Payments Infrastructure Fund (ARCA:TPAY) began trading in February 2019 and contains companies that are focused on the digital payments sector. It tracks the Ecofin 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, check out our list of Canadian fintech stocks, learn more about what Australia has to offer and see which US fintech stocks warrant investor attention.
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.
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