According to a report issued by U.K.-based mergers and acquisitions firm Hampleton Partners, investment by venture capital firms in financial technology companies hit $31 billion in 2018. That’s up from $15 billion just one year prior. The report also revealed that although many of the highest profile deals in the past year involved consumer-facing startups, the majority of money has gone to companies in the enterprise software sector.
Hampleton Partners director and fintech specialist Jonathan Simnett points out that the large amount of investment in the enterprise software market reveals something interesting in how innovation in financial services is playing out: “If you look at financial technology purely through the prism of consumer-facing plays such as Revolut or Transferwise, then you are missing out on a huge amount of activity that is certainly contributing to rapid change in the financial services market, but doing so by catering to established business rather than competing with them.”
Simnett believes that large financial services institutions like commercial and investment banks are driving much of the current investor appetite for fintech. As he notes, these large institutions are aware of the need to get onboard with changes in technology, but are unwilling or unable to fund research and development directly, and so “M&A is the new R&D.”
For VC funds, the recognition of this willingness by large financial institutions to engage in M&A deals to stay ahead of the game technologically helps direct their investment dollars. These funds appear to have realized that an investment in an early-stage fintech company can later become an investment in a large corporate investor’s target.
Hampleton Partner’s report also suggest that, although “big finance” is generally regarded as a global market, the success of fintech companies is often closely tied to geography. Simnett notes, “The fintech market is very regionalized. It tends to mimic the nature of the financial services sector within particular regions and also regulatory frameworks.” As an example, Simnett points to the differences between retail bank innovation in the United States and Europe.
Simnett predicts one last trend in fintech investment going forward: “regtech.” In the face of regulatory upheaval (particularly in the U.K.), fintech companies that are able to help larger institutions face regulatory change have the opportunity to “make money quickly” if they’re able to “develop a solution that solves a regulatory problem.”