H1'2017 hot & concise

H1'2017 hot & concise

The booming fintech sphere intrigues, fascinates, creates scepticism and enthusiasm, but over the years never falls short of maintaining a steady level of dynamism. The year 2017, up to this day, does not betray this infatuation. It respects the previous trends as we witness the strength of the industry and its momentum, pushing forward development and innovation. Their natural rivalry soothing, fintech start-ups and incumbents are starting to embrace the rules of a new game where cooperation is the key to success.

Partnerships and ventures are more and more common, organically developing a network that is becoming sturdier, as are its constituting links – start-ups, scale-ups and financial institutions. Yet, however strong the base, uncertainties remain: some concepts – such as blockchain – belong still in the realm of hope and await the occasion to extend their technology further into the financial industry.

In this paper, we review trends and directions in the industry during this last six months. Processing information from research reports, articles, and news, we provide here a concise summary of the fintech’s hottest.

The global fintech landscape

“Will the fintech market continue to rebound?”[1]

Global investment activity (VC, PE and M&A) in fintech companies

After a slight slackening in the first quarter, the second quarter of 2017 rebounds, notably due to a massive investment in Canada, to reach almost 300 deals for USD 8,4 billion; twice the volume of Q1. The number of deals made has been on a rising trend since 2012, even in less active quarters. Those numbers de monstrate a healthy market, no t devoid of the peaking dynamism of 2015. The increase between Q1 and Q2 lies in the volume of PE and M&A, nourishing the drive (KPMG, Q2 2017).

Following a focus on customer experience, the trend of this first half of the year resides in mid- and back-office concerns: investors favoured investments in B2B, motivated by an improvement of their cost structure; hence investments in AI, robotics, regtech and cloud services have been made to gain efficiencies in internal processes. This can be seen with CCH Tagetik, Pos Portal and ITRS Group, in the top 10 of the global investments (KPMG, Q2 2017).

In terms of volume, North America was the first, notably because of the USD 3. 6 billion DH Corp. deal, followed closely by Europe at USD 2 billion. Asia stays behind this quarter due to a lack of important deals, but remains a key actor expected to be at the centre of the tumult in the next quarters (KPMG Q2 2010). As for Europe, investments have more than doubled in Q2’17,going from USD 880 million in Q1’17 to a volume now reaching almost USD 2 billion.

After a slight slackening in the first quarter, the second quarter of 2017 rebounds, notably due to a massive investment in Canada, to reach almost 300 deals for USD 8,4 billion; twice the volume of Q1. The number of deals made has been on a rising trend since 2012, even in less active quarters. Those numbers de monstrate a healthy market, no t devoid of the peaking dynamism of 2015. The increase between Q1 and Q2 lies in the volume of PE and M&A, nourishing the drive (KPMG, Q2 2017).

Following a focus on customer experience, the trend of this first half of the year resides in mid- and back-office concerns: investors favoured investments in B2B, motivated by an improvement of their cost structure; hence investments in AI, robotics, regtech and cloud services have been made to gain efficiencies in internal processes. This can be seen with CCH Tagetik, Pos Portal and ITRS Group, in the top 10 of the global investments (KPMG, Q2 2017).

In terms of volume, North America was the first, notably because of the USD 3. 6 billion DH Corp. deal, followed closely by Europe at USD 2 billion. Asia stays behind this quarter due to a lack of important deals, but remains a key actor expected to be at the centre of the tumult in the next quarters (KPMG Q2 2010). As for Europe, investments have more than doubled in Q2’17, going from USD 880 million in Q1’17 to a volume now reaching almost USD 2 billion.

VC investments have suffered a small decrease of the in Q2’2017, yet it remains stronger than the previous years, 2016 excepted. If the stage valuation slightly dropped in Q2, it is the second best quarter evaluation in terms of exits. China’s VC investments is left outside of the dynamic, with only USD 760 million in Q2, following the trend of Q1, essentially due to a lack of mega-deals. We can note that international expansion is at the heart of tech giants’ strategy, with the example of Alibaba’s globalization strategy .[2]

The global trends of this year are:

  • Blockchain, AI, insurtech, cybersecurity, cloud computing and robotics
  • Focus on B2B companies (banks wish to diminish their costs)
  • Banks trust fintech start-ups to bring them solutions tin the lead-up to PSD2. We are witnessing a shift in the strategic distribution of funds of financial institutions, with a preference now for back office investments at the expense of the front office.

Here are 21 AI start-ups that will disrupt the market

As we all know, AI is the future, and fintech is no exception. Here are twenty-one start-ups that will likely change the landscape of the industry in the coming years. Disruptiveness, replicability, profitability, productivity are some of the criteria used for the research, undertaken  by Lets Talk Payment. This map of the AI field provides a glimpse into the power to change that AI represents.

Regtech / cybersecurity

2015 and 2016’s investments seem to be heralding a record this year, and the cybersecurity industry cannot keep up with demand. While cybersecurity and regtech are different industries, their fates are connected. R egulators are living through boisterous times, trying to produce measures at the same pace than the technological and financial evolutions currently going on in the Americas, EMEA and APAC. We can see this race in the upcoming PSD2 and GDPR, as well as in numerous bodies of law, such as the implementations of Dodd-Frank in the US, or work on market abuse in Europe. Global compliance is a growing challenge as well, as 15% of companies expect “significantly more” in compliance in the next years.[3]

Highlights of H1 2017

Investments in cybersecurity

Money is big news in cybersecurity this year. Last quarter, 6 cybersecurity start-ups have each raised $100+ million in mega-rounds, making it one of the hottest tech sectors. In an all time quarterly high, the area is on a record breaking year so far, now reaching 146 deals in Q1 and 145 in Q2, 26% more than the previous quarterly high. The same goes for equity funding, which is reaching $1,6B in Q2’17. We can note as well the high number of start-up acquisitions.

Source: https://www.cbinsights.com/research/cybersecurity-deals-funding-acquisitions/

Investments in regtech

Funding for regtech is also on the rise. This is not surprising, but the amount of increase is impressive. In the first quarter of 2017, the number of investments in regtech companies more than doubled. RegTech companies achieved a record number of transactions, raising a combined total of $238m across 34 deals. This reflects a trend in place since new compliance rules post-GFC required companies to invest more in technology to reduce the costs of compliance.

Source: FinTech Global, reproduced in The Fintech Times

Biggest cybersecurity threat is a lack of personnel

Cybersecurity Ventures predicts that by 2021 there will be 3.5 million vacant cybersecurity jobs worldwide. To produce this figure, they analysed employment figures from the media, analysts, job boards, vendors, governments, and organizations globally. According to Monster.com, there is currently a 0% unemployment rate in cybersecurity. Not only is the need for security increasing due to a rise in cybercrime, new talent is not being trained fast enough. Could it be that the biggest threat to global cybersecurity is not hacking, but a lack of adequately trained personnel?

Security breach in European bank

In one of the biggest security breaches in European banking this year, hackers broke into the databases of UniCredit SpA, Italy’s No. 1 bank, taking biographical and loan data from 400,000 client accounts.

Insurtech

“What are the major opportunities driving investment in
insurtech?”[4]

Of all the financial sectors technology is affecting, insurance is one of the sectors that stands to be disrupted the most. Despite the many kinds of financial services now available to consumers, they continue to rely on banks and other local services for their savings, credit, mortgage and pension needs. With insurance, however, the case is not so clear. Consumers don’t trust insurance companies, and they consider insurance products to be effectively identical, since the difficulties of reading the fine print make it difficult to truly compare products.

Insurance companies are aware that unless they change the way they approach consumers, consumers will readily go elsewhere. Thanks in part to an emerging platform economy, not only can consumers buy insurance online from anywhere in the world, new providers and services are emerging, such as unbundled services, new options in the sharing economy or potentially via blockchain.

What does this mean for the market? According to the OECD, global trends are divergent. They found that in just over half the markets surveyed (21/40), insurance companies experienced an increase in direct gross premiums written in real terms. The other half experienced a decrease. Most reporting countries showed positive average returns. Within the insurance sector, however, some players are doing better than others, and companies innovating with financial technology are emerging at the front of the pack.

The three categories most supported by investors are health and travel with USD 9,6 billion; life, home and P&C with 7,01 billion; as well as automotive with 6,77 billion.[5]

Highlights of H1 2017

Funding rises for insurtech start-ups

In 2017, financial technology start-ups in the insurance sector have seen funding rise by more than 200%. According to Martha Notaras from venture firm XL Innovate, start-ups now need partnerships more than they need funding. Start-ups’ business models and low capital requirements make them excellent candidates to solve the problems of larger incumbents. Rather than viewing start-ups as competition, they can be approached as collaborators.

Gabi Personal Insurance Agency raises $2.6 million

Gabi is one of the new wave of small insurance providers who are heavily deploying technology to make insurance better. Gabi aims to simplify the process of comparing and choosing insurance. Based in San Francisco, they raised $2.6 million to develop their algorithm-based comparison models. They derive their quotes via data rather than insurance agents focused on commissions in an attempt to remove bias from the process.

Bridge Health secures the biggest investment of the year in insurtech

The Minnesota-based start-up aiming to improve health insurance wishes to offer “affordable and higher quality healthcare to individuals and their families.”. As the start-up goal is to reshape the healthcare in the US, we can observe the reach of such an industry.

Blockchain

“When will blockchain show it can be commercialized?”[6]

Blockchain is increasingly draining attention and funds from VCs and corporates, but still has to prove the potential value it could bring at an organizational level. A n expansion of the blockchain to insurance, health and government seems very promising, yet is still awaited. Globally, the perception of blockchain stays very positive, with, for instance, the World Economic Forum stating that the “internet is entering a second era that’s based on blockchain” in a white paper published last June[7]—a paper we encourage all to read. Blockchain may revolutionize the digital world, but challenges stand in the way and overshadow its future, such as governance issues and regulation of distributed ledgers.

Highlights of H1 2017

Bitcoin fork, a mixed reception

Regarding important events of the last semester, the Bitcoin fork created quite a lot of heat: when in August the cryptocurrency split in two different branches, Bitcoin Cash was created out of the original Bitcoin, mainly motivated by scaling issues. The smoke has not completely cleared since this event, as safety concerns are still lively. Nevertheless, the cryptocurrency did not suffer exceedingly from this and is still on a fluctuating but globally rising trend.

Source: Coindesk

Big corporates show interest in blockchain

In accordance with the World Economic Forum research paper, a research report from Juniper Research published last month announces that 57% of big corporates consider using blockchain technology, and more than two third declare they will include it in their systems by 2018.

Market cap jumps to unprecedented high

We can mention as well the tremendous market cap explosion cryptocurrencies underwent these last months. Ethereum’s market cap was stagnating in February at USD 1 billion, but is now peaking at USD 30 billion in August. As for Bitcoin, it rose from USD 15 billion to USD 65 billion between January and August.

Ether price fluctuations

Source: https://coinmarketcap.com/currencies/ethereum/

Conclusion

The first semester of this year confirms our expectations for fintech, as the tumult this area is going through is not abating. The year seems to be on track for a new record of activity, and it is unlikely to stop soon. The slumps in the market that strike from time to time, and from place to place, are modest in comparison with the global growth of the market. Some challenges, such as regulation issues, will not likely be brought down soon or easily, but they do not pose a direct threat to the well being of fintech’s future.

  By Jean Leguy, Research Analyst at Holland FinTech   Notes [1] KPMG International Cooperative, Pulse of Fintech Q2 2017 research report p. 2 [2] http://www.alibabagroup.com/en/ir/pdf/160614/08.pdf [3] Journal: The CAPCO Institute, Journal of Financial Transformation, April 2017, n°45, p. 26 [4] KPMG International Cooperative, Pulse of Tintech Q2’2017 research report p. 2 [5] https://insurtechnews.com/insight/insurtech-sector-quarterly-update-q3-july-2017.html [6] KPMG International Cooperative, Pulse of Fintech Q2 2017 research report p. 2 [7] World Economic Forum, Realizing the Potential of Blockchain, June 2017, p. 5  ]]>

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