2019! It sounds like ancient history already doesn’t it? But it was certainly an amazing, maybe even a record year for mergers and acquisitions and investments. You may know that January is named after the ancient Roman god Janus, the god of the future. Depicted with two faces, he looks both backwards to the past and forwards to the coming year.
So with Janus in mind, I thought it was worth taking a look at what drove the tremendous growth we saw, whether it will continue, the positives and negatives and the impact on the broader global fintech market.
What were the drivers for growth?
According to EY’s UK FinTech Census 2019, the average total investment raised by firms grew from £15mn in 2017 to more than £20mn in 2019 — an increase of 33%. And no, the rate of growth shows little signs of slowing down, with 37% of fintech’s expecting to double their revenues over the next year. So, what’s behind this growth?
- We’re operating in an increasingly regulated business environment. Anti-money laundering, fraud, data protection – these obligations are all putting huge pressure on the compliance guys. It means that regulatory technology, or ‘regtech’, is becoming more important and relevant than ever before. The result? Financial institutions are spending more on regtech, to streamline and automate processes, and protect themselves from non-compliance and the consequent fines.
- Digital banks continue to grow their market share at a rate of knots. The likes of Revolut and Monzo grew rapidly during 2019 and are forecast to treble their customer base by the end of 2020 to 35 million customers. In contrast, the traditional banking sector is expected to grow its customer base by 1%. With such dramatic growth, we’ll see more new entrants into the digital financial marketplace.
- The growing demand for contactless and mobile payments, such as Apple Pay, which have become a key element of fintech. The flip side is concerns about security, fraud and data breaches that are common with these types of technology. It’s an area that can devastate the reputation of an organisation and so drives investment in safety systems.
- Financial sponsors are driving fintech growth with their lending. By the end of August last year, over $2bn was invested in London-based fintechs across 114 deals, according to a report by London & Partners and Innovate Finance. In another report by the European Investment Fund, there’s a suggestion that areas such as artificial intelligence and machine learning have motivated venture capitalists in their investment preferences.
- A raft of mergers and acquisitions fuelled a record volume of fintech deals during 2019. A report by Dealogic demonstrates how the value of such deals has grown compared to the previous year, with an average 4x increase in the value of the transactions.
- And in the sector that’s closest to my heart, investment management and trading technology, Artificial Intelligence and Machine Learning are having a massive impact on growth. AI and ML underpin increasingly intuitive systems, ones that can support the human workforce to make incredibly fast trading decisions, thanks to the ability to recognise patterns and anticipate future events. Autonomous ML can automate repetitive tasks by creating positive rules and use insights into data on liquidity and execution to support decisions.
Growth and consolidation are good, right?
There are always two sides to the story. For example, some big boys buy small software firms purely for their predicted revenue streams. They have no intention of investing in developing products after acquisition, just in milking the cash cows already produced for as long as they are profitable. This results in a declining experience for the customers using the systems and a frustrating and anxious time for the workforce.
Implementing new systems, such as a Portfolio Management System, is very expensive and disruptive. It takes time to do it properly. A different culture in the acquiring company can cause clashes with those taken over. A disgruntled workforce means people leave, taking with them the knowledge of the systems already developed.
But it can be a very constructive move. When companies consolidate in a positive way, good things happen. Strategies can be streamlined, complementary solutions added, portfolios strengthened, and access to improved, easy to use systems for clients developed.
And how does fintech impact on the broader financial landscape?
For those monitoring the sector, their concerns are that the growth of fintech, like any other disruptive technology, poses a risk that may lead to financial instability. Most fintech start-ups are not subjected to the same regulations as the more traditional financial institutions.
As a result, it is the more open financial markets that have seen fintech develop very rapidly. M-Pesa e-payment system is an example. Operating in Kenya and other African countries, it is one of the biggest fintech success stories. At its heart is the transformation of mobile phones into a way to store and transfer money, and it has increased financial access for many people who previously had no banking facilities, used by over 25 million people at the start of 2019.
It’s a great example of how fintech can disrupt the established financial sector and deliver increased efficiencies in the economy.
There are an estimated 1.7 billion people worldwide without bank accounts.
Replicate the financial inclusion that fintech has delivered in Kenya more widely, and we see savings being channelled into investments in industry, into infrastructure, and into human capital. These developments have the ability to raise growth in emerging economies. So the impact of a growing fintech sector is far-reaching.
What’s happening in your organisation? Have you experienced growth during 2019 and if so, what drove it? Join the discussion by commenting below.