Much has been said about the vibrancy of the FinTech industry, but 2020 began with a sharp decline in funding. Things are set to improve, but in which specific areas?
Covid-19 has transformed business and consumer behaviour drastically. While the long-term impact of the pandemic remains to be seen, more and more businesses are starting to come to terms with a period of prolonged uncertainty.
One thing is clear – the changes in consumer behaviour as a result of pandemic mitigation measures around the world have accelerated digitalisation, prompting experts to say that FinTech enterprises are well-placed to thrive in this environment.
However, according to CB Insights Q1 State of FinTech report, FinTech funding activity stalled as investors pulled back investments.
This was the story across the board in key financial verticals, partnership activity, public company earnings call transcripts, and overall deal funding across the world.
Here are the key findings of the report:
- In Q1 2020, VC-backed FinTech funding declined to $6.1 billion across 404 deals. This is the worst Q1 since 2016 for deals and the worst Q1 for funding since 2017.
- Recession forecasts dampened sentiment to the extent that investors pulled back on early-stage bets to focus on fortifying portfolios. Q1 2020 early-stage (seed & Series A) startups saw 228 deals, a 13-quarter low, and $1.1 billion in funding, a 9-quarter low.
- FinTech funding in Asia, North America, Australia, South America, and Africa dropped quarter-over-quarter. Asia experienced a 69% drop in funding (to $883 million) and a 23% drop in deals quarter-over-quarter. It was not all bad news though. Europe saw an increase in funding, the only major region to do so.
BRIGHT LIGHTS AT THE END OF THE TUNNEL
While Q1 looked generally bleak, a UBS report says that revenues from FinTech are expected to increase from $150 billion in 2018 to $500 billion by 2030 at an average annual growth rate that is approximately three times faster than the financial industry’s general projected revenue growth.
The sector is expecting consistent double-digit earnings growth (per year) for the next eight years and according to UBS, it is well-positioned to be among the world’s fastest-growing sectors internationally.
Digital payments, online lending, insurance technology (Insurtech), Wealthtech and capital markets technology are set to be vital growth areas.
However, investors are likely be cautious about investing in startups, placing their bets instead on established players.
Among the areas that will bring opportunities are blockchain or distributed ledger technology (DLT) and artificial intelligence (AI).
UBS predicts that blockchain tech or DLT will generate $300-$400 billion in yearly economic value, internationally, by 2027 and will be adopted across six main sectors, including financial services, manufacturing, healthcare, public services, utilities, and the sharing economy.
Blockchain can be instrumentalised in processes requiring disintermediation and automation in the financial industry, resulting in greater efficiency and monetary savings.
THE GROWTH OF AI
The report also touched on Artificial intelligence (AI). It predicts AI will significantly improve traditional business processes as it will enable businesses to offer helpful virtual assistants, chatbots and sophisticated speech recognition software to facilitate customer interactions.
In the context of customer interactions, AI will also be key to automating wealth management advice in the form of robo-advisers.
GlobalData Financial Services’ 2020 Banking and Payments Survey found that the use of robo-advisers is increasing among all age groups. In the US, 7.2% of baby boomers used a robo-adviser in 2019. This figure has risen to 7.8% in 2020. While in 2019, only 13.6% of Generation Z used robo-advisers, in 2020, 16.4% used them.
However, this doesn’t mean that the need for the human touch will be obliterated.
Certain interactions, especially during market crashes, are predicted to continue demanding communication between investors and advisers. Clients seem to still require reassurances from a human when it comes to securing their wealth. Experts project that hybrid robo-advisers will provide a healthy balance of digital and human interaction.
The insurance industry is also set to benefit from AI as the technology is capable of supporting better products and pricing, underwriting, target marketing and sales, claims management, and data mining.