The digitization of the financial industry has accelerated in recent years, and investment in fintech has emerged as an attractive wealth-building opportunity for investors.
In 2020, global investment in fintech totaled US$105 billion, according to KPMG. While that’s a big number, overall investment was down compared to the previous year, largely due to the impact COVID-19 had on most industries on a global scale.
By comparison, the fintech market saw US$168 billion of investment in 2019. Aside from the coronavirus, KPMG attributes 2020’s decline to “the lack of mega-M&A deals” in first half of the year.
Despite the setbacks of 2020, the global fintech market is anticipated to grow at a compound annual growth rate of around 20 percent between 2020 and 2025, states Research and Markets, and is expected to reach a market value of around US$305 billion in that time.
Growth in venture capital investment, investor interest and private equity investment have all helped fuel innovation and investment in fintech. Read on to learn more about this flourishing market.
Investment in fintech: Global market breakdown
2018 and 2019 were banner years for investment in fintech. These years were marked by a number of major fintech deals that were characterized by their size and geographic diversity.
Many private equity firms took notice during this time and placed their money into fintech. Among others, Blackstone invested US$17 billion in Refinitiv, while P2 Partners and Silver Lake, a global financial technology business, acquired Blackhawk Network for US$3.5 billion.
In 2020, venture capital investment in fintech was strong despite global uncertainty. In fact, KPMG reported that fintech investment from venture capital sources totaled US$42.3 billion, marking the second highest venture capital investment year after 2018.
The digital banks sector saw the most venture capital investment in 2020, with Sweden-based Klarna raising US$650 million, Revolut taking in US$580 million and US-based Chime scoring US$533.8 million.
More mature companies also made large raises, including wealthtech player Robinhood, which brought in the largest venture capital investment in H2 2020: US$1.3 billion across two deals.
Corporate participation in venture investment remained high in 2020, due in part to the strategic nature of these investments. Corporate investment in fintech came to US$21 billion globally during the period.
US corporations are also investing more in fintech capabilities as a means to support their business strategies. KPMG notes that “the pandemic showcased the value of many fintech sub-sectors as consumers and businesses shifted to digital solutions to meet their financial needs.” Fintech investment in the US totaled US$75 billion in in 2020, and investors see fintech as a key growth vehicle.
In the Asia Pacific region, while fintech investment fell to a six year low of US$11.6 billion in the face of the COVID-19 pandemic, corporate investment remained resilient. KPMG said this was “in part due to corporates looking to accelerate their digital transformation efforts in the face of COVID-19.”
In Europe, venture capital investment in fintech remains strong, although funding remains a challenge for early stage companies. However, the region experienced a record US$4.8 billion in venture capital funding for fintech companies in 2020.
Investment in fintech: Current market status
As the sector continues to mature, a number of trends are characterizing the fintech industry.
For its part, management consulting firm McKinsey & Company states that four trends are shaping the capital markets infrastructure side of fintech: distributed ledger technology, artificial intelligence (AI) and advanced analytics, quantum computing and post-trade products.
The financial technology sector is advancing in many ways, both locally and internationally, in areas like real estate, peer-to-peer lending, cross-border payments and general lending. Both the wealth management sector and portfolio companies are recognizing the benefits of fintech.
According to the Fintech Growth Syndicate, paytech accounts for the largest segment of the Canadian fintech ecosystem, standing at 25 percent of the industry. A paytech company is defined by Payments Canada as a company that uses technology to enable the electronic transfer of value.
KPMG highlights in its report that emerging technologies such as AI, blockchain and cybersecurity will continue to play important roles in shaping the future of the fintech industry.
A number of firms, including Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS), are applying cryptocurrency and blockchain technology to their operations.
Recently, S&P Global said in a report that “even in the teeth of the pandemic, there has been a steady flow of financial technology mergers over the $1 billion mark.”
The report highlights global credit card networks such as Mastercard (NYSE:MA) and Visa (NYSE:V) as important drivers of this activity. “Mastercard and its peers are using fintech acquisitions as a way to reinvent themselves and to signal to the market that they are more than just a set of payment rails, industry observers say,” states the firm.
Visa started off 2020 with a US$4.9 billion cash acquisition of California-based Plaid, which provides application programming interfaces (APIs) that are central to open banking technology. In mid-2020, Mastercard bought API specialist Finicity for US$985 million.
In another report, S&P Global notes that the Asia Pacific region is on track to become a major hotbed for fintech startups as large banks in the region beef up their financial technology platforms. “For banks, the value of working with these platforms lies in the potential to unlock a new customer segment,” it states.
Investment in fintech: How to start
If you’re serious about making an investment in fintech, there are a number of ways to step into the sector, including exchange-traded funds (ETFs) and stocks.
ETFs provide exposure to multiple companies at once. Fintech-focused options include:
- The Global X FinTech Thematic ETF (NASDAQ:FINX) was launched in September 2016; contrary to its name, 65 percent of its holdings are US companies.
- The ARK Fintech Innovation ETF (ARCA:ARKF) launched in early 2019. The fund’s stated goal is to capture “the introduction of a technologically enabled new product or service that potentially changes the way the financial sector works.”
- ETFMG Prime Mobile Payments ETF (ARCA:IPAY) launched in 2015 and focuses solely on mobile payments stocks.
- The Tortoise Digital Payments Infrastructure Fund (ARCA:TPAY) began trading in February 2019 and contains companies that are focused on the digital payments sector. It tracks the Tortoise Global Digital Payments Infrastructure Index.
Fintech companies are popping up left, right and center, and it might be overwhelming for some investors. As a starting point, check out our list of 12 Canadian fintech stocks, learn more about what Australia has to offer and see which US fintech stocks warrant investor attention.
Whichever investing path you choose, it’s clear the fintech sector has grown considerably in recent years as more private equity and fintech investors enter the space. Companies continue to innovate in finance and ultimately the capital markets. The industry looks likely to keep expanding in the future.
This is an updated version of an article originally published by the Investing News Network in 2016.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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