Investments in FinTech and InsurTech remain high

15 August 2017 Consultancy.uk

FinTech firms continue to attract investment from start-ups, as new entities look for ways to disrupt current financial markets, while venture capitalists remain interested in investing in companies, although they have taken a more cautious approach. Latest figures show investment in Q2 2017 running at around $8.4 billion, around double of Q1, though still lower than Q2 2016.

The financial technology (FinTech) sector, which leverages a range of new technologies, has resulted in a number of innovative – and potentially disruptive – companies developing propositions, thanks to the continued high demand for financial services. The value of the financial services industry, coupled with the potential for capital light newcomers to bypass incumbents’ dependence on legacy systems – has opened the door for substantial digital disruption.

The size of the industry, mixed with this low-hanging fruit has led to explosive growth in creative enterprises, thanks to a potent combination of entrepreneurial engagement and venture capital (VC) investment. The market has seen ups and downs in recent years, as investors became weary of inflated promises and ultimately lower outcomes, however the latest report from KPMG into the industry, titled ‘Pulse of FinTech Q2 2017’, suggests that investment is once again on the upward curve.

Global investment activity in FinTech companies

The investment into FinTech firms from venture Capital, Private Equity and Merger & Acquisition deals, saw its most recent peak in 2015, at around 380 deals per quarter. Investment activity saw decline in 2016, started off at relative high levels of activity, before falling steeply in the second half of the year as wider venture capitalist concerns around valuations, among others, stemmed the market. This year so far has been off to a slow start, with relatively low values invested – but a surge in Q2 2017 saw a return to robust deal activity at around 300.

Investor interest remains

In terms of investment from venture capitalists, strategic changes continued to see shifts in terms of investment stage. Like the wider VC space, focus has shifted to late stage funding to support scale, with investors continuing to be weary of funding a large number of Angel/Seed and early VC entities. Overall however, the number of deals in the sector was relatively robust, with just under 300 deals in the latest quarter, down slightly on around 325 in the previous quarter.

Investment value has meanwhile shifted to early stage and seed/angle stage companies, with the latter increasing from $1 million on average last year to $1.3 million on average so far this year, while late stage investment averages dropped from $18 million to $12 million. This is part of a wider trend in the market that has seen investors keen to targeting their investment more strategically towards companies that are likely to generate long-term value.

Exit and type

Exit activity has remained relatively weak in the most recent period, in line with earlier trends. With around 20 exits in Q2, although up slightly on Q1 when there were 16, the relative early stage of the wider market most likely means that a relative lack of maturity is inherent – resulting in relative variable outcomes.

Venture-backed exit activity

In terms of exits, the year-to-date so far has for the most part been to strategic buyers, with the number of buyouts down on last year, while the number of IPOs in the sector has hit levels seen in 2016. The lower level of IPOs in the segment follows a similar trend in the wider VC landscape.

In terms of value raised, the study found a considerable drop off relative to 2016, when a combination of buyouts and strategic acquisitions created the highest level of value. However, 2017 so far, pales in comparison to the total results for 2015 and 2014, both years saw more than $3 billion raised.

Venture backed exit by type

Commenting on the current trend in the market for FinTech, both in terms of startups and corporate activity, Ian Pollari Global Co-Leader of Fintech, KPMG International and Partner at KPMG Australia, said, "In order to compete and win in the future, financial institutions will need to become far more aggressive around reducing their cost base. This will likely drive significant corporate interest in fintechs, helping them achieve cost efficiencies through the deployment of smarter technologies within their operational and product areas.”

Profile

×

The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.