Written By: Susan Smithfield – International Director
2015 was the year of explosion in the amounts invested by venture capital funds in the startups of financial services, according to KPMG; around $46.7 billion was invested that year in the startups of the sector. However, in 2016, a sudden 50-percent decrease arose after two exceptional years. According to the KPMG quarterly report titled “The Pulse of Fintech”, published in partnership with the CB Insights venture-capital database, fintechs’ funding was estimated to be a total of $24.7 billion in 2016. In Europe, investments amounted to $2.2 billion, of which more than $200 million was in France. The biggest players were Chinese (Ant Financial, a subsidiary of Alibaba) and American (Stripe); however, several European fintechs stand out among the top 14 valued over one billion dollars (the Dutch Adyen, the Swedish Klarna, the British TransferWise).
Fintechs with capitalisation above $1 billion, Wall Street Journal, March 2017
The pause in raising funds for fintechs in 2016 could be partly explained by political and economic situations in 2016 (the US election, Brexit, China’s economic slowdown.). And recently Chinese restriction rules on foreign transfers have weighed heavily on fintechs’ development. Indeed, the British House of Fraser, a chain owned by the Chinese conglomerate Sanpower, was to inject a total of £35 million into the new Tandem Bank. But Sanpower blocked its investments in fintechs due to the new restrictions imposed by Beijing on foreign investments.
The question now arising is whether or not the fintech market is entering a new phase, possibly leading it to be more similar to banks.
Indeed, governments and regulators are recognizing the value of fintechs’ innovations; they are beginning to realize the important role that fintech innovation can play in modernizing financial services. And in this win-win strategy, they also have recognized that improving the efficiency of the banking system can improve the performance of the economy as a whole. Examples include the efforts made by European regulators to push banks toward modernisation and automation of payments (Payment Services Directive 2) and the General Data Protection Regulations. Governments and financial regulators have moved quickly to support the development of fintech hubs in order to help fintech companies manage the regulatory challenges associated with new technologies. For example, in 2016, the United Kingdom, Australia, Singapore, Malaysia and Thailand all announced the development of regulatory sandbox programs. A regulatory sandbox program allows businesses to test innovative products, services, business models and delivery mechanisms in live environments.
And nowadays both traditional banks and fintechs share common interests to work together.
On the one hand, fintechs need to develop their financial functional coverage with more services. And some of them reach a stage at which they need funds to acquire expensive but traditional banking platforms, if they want to hold clients’ accounts. On the other hand, banks that have focused their energies in past years on “cleaning up” the impacts of the last financial crisis and meeting new regulatory requirements for liquidity and capital now have a strategical interest in speeding up their digital transformations.
Banks need to win more time for innovation to curb revenue losses, and fintechs need to grow and develop synergies to avoid heavy increases in infrastructure costs.
In the recently published PwC (PricewaterhouseCoopers) study “Redrawing the Lines: FinTech’s Growing Influence on Financial Services”, four of five banking executives worry they will lose revenues to independent fintech firms. The erosion of revenue, lack of time or “too big size-wise to become digitalized” are a few reasons for a bank’s strategy to naturally evolve toward the purchase of external, ready-made platforms. According to PwC, 80 percent of respondents (1,308 financial-services managers worldwide have been polled) believe their businesses are now at risk. 88 percent state that they are already losing revenue to innovation.
Banks have different ways to limit the impacts of the innovation time lost:
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45 percent of participants in the PwC study are already partnering with fintech companies, and 82 percent are planning to do so in the next three to five years.
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Banks can also buy fintechs to win time…and money. In the PwC study, a fintech return on investment can reach 20 percent. Almost 50 percent of financial-services firms around the world plan to acquire fintech startups in the next three to five years.
And in France, a groundbreaking deal could signal the beginning of the integration of banks and fintechs: BNP Paribas has agreed to buy French digital bank Compte-Nickel for €200 million ($213 million). That’s the biggest fintech acquisition ever in France, according to Maïa Thomine Desmazures, a spokeswoman of La French Tech.
The time for vertical and/or horizontal integration strategies for banks with fintechs seems to have arrived.