Fintech buoyant despite funding fall

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A new report into global fintech investment trends shows that deals involving European companies in the space rose 11 percent in 2016 to 179, with the UK and Germany dominating the results.

Data analytics company CB Insights released its latest report on the future of fintech just last week. It noted that in Europe VC-backed companies raised $1.2bn over the course of 2016, but although the number of deals rose, the total funding represented a fall of around $400m on the 2015 figure.

Total investment in fintech companies tracked by CB Insights hits $12.7bn in 2016 with 836 deals completed. This marked a 13 percent retreat from the figure in 2015 but only a 1 percent fall in the total number of deals.

Of the total investment, seed stage investments accounted for 39 percent of all deals while Series A deals made up a further 25 percent of the total. The total number of deals for both these stages reached a five-year high of 114. The average deal size, though fell back slightly to $2.2m in the fourth quarter, down from $3m in the third quarter.

Among the bigger deals involving European fintech firms was a $29m Series C funding round for UK-based small business loans company ezbob.com and a $37.5m Series C round for robo-advise offering Nutmeg.

Among the most active investors in the area were Seedcamp, the early-stage investment house.

In terms of UK investment, VC-backed fintech companies raised a total of $173m across 16 deals in the final three months of 2016, after a relatively poor third quarter where total deals slumped to just 12 and total funding was down at $78m. This compares with a peak in investment in the final quarter of 2015 when the total surpassed the $275m mark and 19 deals were completed.

Perhaps surprisingly, the report found that funding for blockchain or bitcoin companies fell for the third straight quarter globally to $69m in the last three months of the year. Investment in blockchain and bitcoin peaked in 2016 in the first quarter when it hit $150m globally.

The first quarter 2016 blockchain figure was helped by the funding of bitcoin startup Blockstream in February last year, which raised $55m in a funding round led by Hong Kong billionaire Li Ka-Shing’s Horizon Ventures, and the $50m funding for New York-based startup Digital Asset Holdings which raised money from a number of major banks and financial institutions including JP Morgan and Santander InnoVentures.

In terms of interest in fintech, Santander was among the leading banks in terms of number of deals with eight financings undertaken in 2016. This was equalled by Goldman Sachs and Citi.

Payments financing was more buoyant globally with $477m worth of deals completed in the fourth quarter, up from $402m in the third quarter. In total, the year saw $1.63bn of funding deals.

Europe sat behind both Asia and the US when it comes to total investment, though, which saw fund-raising total of $5.4bn and $5.5bn respectively. The number of deals in the US fell back to 422 while China was the driver in Asia with $4.6bn of the Asian total.

In Europe, new legislation at an EU level is likely to be a driver for further fintech innovation in the coming years with the introduction of the second Payments Services Directive (PSDII) considered by those in the space to be a main driver.

A report from payments experts at Acccenture last May made the point that the directive specifically requires financial institutions to provide grant to third-party providers to a customer’s account via an API should it be requested.

As the report said, access to customer accounts via APIs enables the provision of entirely new types of service. “The move to open APIs will also serve to increase the rate of disruption within the financial services industry,” the authors wrote. “Many traditional business models across a variety of industries have already experienced dramatic change driven by APIs.”

The report suggested that the key to success for the banks would be to understand the disruptive threats they faced and “adapt to this changing landscape by evolving their business models to leverage APIs as an enabler of new products and services.”

In the UK – as GamCrowd has previously written about – this process is being enabled by the Financial Conduct Authority (FCA) which last year instituted a ‘sandbox’ programme which allows startups to test new ideas and technology in a lightly-regulated live environment.