Is FinTech the new favorite destination for investor money?
When Berlin-based online bank N26 completed its EUR 775 million fundraising round in October, which valued the company at more than EUR 7.76bn, it became the highest valued FinTech in Germany and one of Europe's most valuable FinTechs, behind buy-now-pay-later leader Klarna from Sweden and online banking giant Revolut from the UK, but ahead of other UK neobanks such as Starling and Monzo.
The sheer size of the transaction and the absolute valuation left many people wondering how a "start-up" founded in 2013 can be worth about as much as Germany's second-largest private bank, Commerzbank which was originally founded in 1870, and is currently trading at around EUR 8.5bn.
While the US has the most unicorn companies (startups valued at over USD 1bn), Europe is catching up. N26 is just one of many FinTechs to have raised a considerable amount of money during a financing round in 2021[1]. At the beginning of the year, the global fundraising rally started when US-based trading app Robinhood raised USD 1bn in January, and then in February raised another USD 2.4bn. Klarna also completed two rounds this year, raising USD 1bn in March, and then a further USD 639 million in June.
Other notable financing rounds include broker app Trade Republic's USD 900 million fundraising in May (that made the company Germany's biggest private fintech firm by valuation – USD 5.3bn – a record that is now in the hands of N26), Brazilian online bank Nubank's USD 750 million fundraising in June, and German digital insurance company Wefox's USD 650 million fundraising in June.
The new reality is that, in Q3 of 2021, global FinTech funding broke records - FinTechs globally raised USD 31.1bn across 1,185 deals. It is predicted that Global fintech funding for 2021 will cross the USD 120bn mark[2]. Mega-rounds were most prominent this year and composed more than half of the total funding, while later-stage FinTechs were most relevant, with the median deal size reaching USD 90 million. Notably, WealthTechs - companies helping to automate the investment process – attracted massive amounts of capital, as investors eyed huge growth opportunities in this area.
The lesson from today's markets is that revenue growth appears to be much more important than any other metric - especially for FinTech companies. Moreover, companies offering growth potential can secure valuations that greatly surpass more traditional players. Across the sector, FinTech startups are receiving extremely high valuations – much more than their investors were willing to pay in previous rounds.
Driven by the impacts of the COVID-19 pandemic, FinTech segments are becoming increasingly diverse, "with solutions increasingly embedded into offerings, retail apps and ecosystem platforms" [3]. Also, the COVID-19 pandemic has led to an immediate and profound economic upheaval in many economies and a shift in consumer behavior. Following increased public spending, paired with an increasing fear of inflation, many consumers have renewed their focus on wealth creation and wealth preservation.
COVID-19 accelerated digitalization across all industries around the world and while global wealth managers now see digitization as an area of priority, consumers are embracing B2B trading and investment platforms. We, therefore, expect increasing fundraising and M&A activity, especially in the field of European online brokers and around secondary online marketplaces for debt-and real estate sales focusing on more illiquid products.
RegTech and cybersecurity are booming as well, as companies scramble to comply with increasingly stringent regulations and stay in control of the growing market for fraud. Investments in these segments are on the rise with many records being broken in 2021.
The hype is also swelling around crypto and blockchain from both private and public stakeholders. Perhaps the most prominent event this year was The Bitcoin Law, which was passed by the Legislative Assembly of El Salvador, giving bitcoin the status of legal tender within El Salvador, as of 7 September 2021.
Finally, InsurTechs have received attention from public markets, with significant IPOs and SPAC mergers driving up interest and valuations.
As the FinTech space grows, regulators are aware of the need to innovate and keep up[4]. Thus, they try to "support and promote FinTech activities through actions such as creating regulatory virtual spaces." The main areas of concern for regulators are investment fraud, security of cryptocurrencies, systemic risk regulation, central bank functions, money laundering, and taxation.
Given the diversity of financial ecosystems globally, there is no one-size-fits-all approach to regulation. Therefore, it is essential for regulators to identify responses to the new and innovative ways that financial services are used and ensure that market integrity is maintained.
In conclusion, FinTech funding momentum will continue to remain strong for the rest of 2021 and throughout 2022, while startup valuations are expected to increase further. Increasing valuations leads to increased investor interest, which further fuels high valuations. As FinTechs continue to grow across all segments, the regulators must innovate to keep up.
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By: Nicholas Hanser, CDI Global Member
[1] Fintechnews Sinagpore
[2] CB Insights: State of FinTech Q3 2021 Report
[3] KPMG: Pulse of FinTech H1 2021 – FinTech segments
[4] Sanction Scanner: Overview of FinTech Regulations in the World
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