Out-Law News | 11 Mar 2016 | 10:05 am | 3 min. read
VC funds totalling $13.8 billion were invested in financial technology businesses last year, up from $6.7bn in 2014, according to 'The Pulse of Fintech' report (85-page / 3.86MB PDF) by KPMG and CB Insights.
Expert in financial services and technology Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said that the report highlighted the global nature of financial services and the need for financial technology companies to "think cross-border".
"Fintech companies need to make sure they look beyond authorisation and immediate regulatory compliance issues to prepare themselves for the commercial opportunities and challenges that will arise when their businesses mature," Scanlon said.
The KPMG and CB Insights report said: "It’s hard to imagine how fintech will evolve next. Geographic diversification has led to fintech hubs rising in numerous locations – London, Sydney, Tel Aviv, Singapore and Hong Kong to name a few. Embracing fintech is not simply about looking to Silicon Valley. Different geographies are putting their own spin on fintech, creating new sub-sectors almost every day."
"While the rise in mobile in Asia opens the door to reaching unbanked and under-banked communities, in Europe fintech seems more focused on creating efficiency, cost-effectiveness and just-in-time personalised services to meet growing customer demand," it said.
According to the KPMG and CB Insights report, $7.7bn of VC funding for financial technology companies in 2015 was invested in North America in 378 deals, with $4.5bn invested in Asia in 130 deals. In Europe, there were 125 VC funding deals for financial technology businesses recorded, valued at $1.5bn in total.
The report said that Europe lagged behind Asia and North America in terms of "fintech mega-rounds" of VC investments.
"Part of Europe’s fintech challenge historically has been the ability to grow businesses to scale," the report said. "With a wide variety of cultures, languages and regulatory environments – the ability to grow startups is somewhat hindered. This has been slowly easing as a result of growing collaboration aimed at reducing regulatory barriers and increasing banking sector efficiencies across Europe. Initiatives like the Single Euro Payment Area, the Payment Services Directive 2 and the promotion of a single digital market are helping to create a stronger environment for fintech companies to thrive in the future."
There were 61 VC funding deals in the UK in 2015 for financial technology companies worth $962 million, up from the 42 deals in 2014 which raised $409m in total, according to the report. Germany saw 21 VC funding deals for financial technology in 2015, with a total value of $193m.
KPMG and CB Insights said that insurers can expect to see more growth in financial technology businesses.
"Insurance-tech as an industry is likely to grow, with many insurance companies in Europe ripe for the same levels of transformation as banking," the report said. "Interest in insurance-focused startups is growing quickly, with unicorns Zenefits, Oscar and Gusto all reflecting new models of insurance, payroll or benefits provision."
KPMG and CB Insights also said it was now time for financial services businesses to experiment with blockchain technologies, but that wholescale implementation of blockchain was still some way off.
"Corporates that encourage use-case testing – whether for the securities trading lifecycle, the processing of a loan, or digital identify verification – and who can learn from this experimentation can be better positioned to adjust course and achieve the most value," the report said. "More widespread implementation at this stage could have serious financial consequences should the technology not live up to expectations."
Earlier this week Scanlon of Pinsent Masons welcomed the broad collaboration between many of the world's largest banks and technology providers in testing blockchain as a platform for asset trading. A collaborative approach to blockchain was also endorsed in the KPMG and CB Insights report.
"To be the disruptor investors envision, blockchain protocols and solutions must evolve to support the reliability, efficiency and scalability requirements expected in the industry," the report said. "It also needs to be a differentiator, rather than simply an enabler. And, it needs to be adoptable by all parties in the banking supply chain – a fact that will require significant collaboration across industry, regulatory bodies and those supporting potential solutions."