Last year was characterized by mixed performances in global financial markets. While corporate M&A maintained a blistering pace through much of the year, the second half witnessed the high-yield debt market falling into a full-fledged rout, with equities worldwide experiencing…
Last year was characterized by mixed performances in global financial markets. While corporate M&A maintained a blistering pace through much of the year, the second half witnessed the high-yield debt market falling into a full-fledged rout, with equities worldwide experiencing prolonged turbulence and global commodities being driven back into the ground (pun very much intended!), led by tumbling oil prices. Given the previously lofty valuations in most asset classes (outside of commodities) this kind of turbulence was inevitable, triggered in this case by China slowdown fears.
Amid the market turbulence, one area of notable strength was the Fintech sector, where investment and deal activity remained at elevated levels throughout the year.
A number of analysts characterised it as an astounding year for Fintech startups, with the number of new ventures in the sector reaching an estimated 5,000 to 6,000 worldwide. That number includes startups in several Fintech sub-sectors, ranging from consumer facing categories, such as virtual banking, online lending, and crowd funding, to B-to-B oriented ventures, focused on data analytics, cloud computing and mobile payments. According to a research estimate by Accenture, total new investment in these Fintech ventures reached the record setting level of $15 billion during the first nine months of 2015, compared to $12 billion in new Fintech investment for the full year of 2014. Have to say that we at Aurigin (formerly BankerBay) also benefitted from a slice of this pie!
While there was a sustained high-level of investment activity in the sector, a few later stage Fintech companies did encounter headwinds in the public market, facing the same weak conditions that afflicted the IPO market generally. Both Lending Club and OnDeck, which were early movers in the consumer lending space, went public almost a year ago, but as of December 31, 2015 both share prices had dropped over 50% compared with the IPO listing price.
Perhaps equally as significant as the enthusiasm of venture investors to support Fintech startups, 2015 was definitely the year in which traditional banking mammoths began to take note of their nimble new rivals. Up until quite recently, the entrenched financial giants had all been exceedingly hesitant to get involved, taking comfort in the substantial regulatory barriers that impeded startups from making inroads in their markets. But in the last 12 months Citigroup, Wells Fargo and JPMorgan all announced they were either taking stakes or co-venturing with Fintech startups in new business initiatives. As far as I’m concerned these are long awaited, great signs for the fintech sector, and for the evolution of the banking industry as a whole. From my personal experience of 2015, I can underline that outreach from the big banks to companies like Aurigin has accelerated tremendously over the year.
In another sign of the growing interest and acceptance of Fintech market activity, financial regulators have begun to take significant steps to support and spur innovation in the financial markets. The Financial Conduct Authority (FCA) in the United Kingdom has been particularly active in this regard, taking a number of steps to encourage experimentation with new technology and business processes. In the spring of 2016, the FCA will expand upon these efforts by setting up what has been dubbed a “regulatory sandbox”, in which Fintech companies will be able to test out innovative products and services, without facing the need to contend or comply with the usual regulatory hurdles and roadblocks.
What I do fear however is that the word “fintech” has already become a fad, and the banking industry has engaged in this sector with the same herd mentality that has caused big bubbles (often followed by equally big corrections) in other sectors through the ages. Many verticals in the space are already hugely overcrowded and perhaps even over-funded. This I feel was a significant factor that contributed to the post-listing underperformance of the aforementioned darlings of the fintech world. These are both great companies but through no fault of theirs, they seem to have suffered from the latest bout of the market’s “irrational exuberance”.
I personally would like to see more discerning, long term investment in the sector with asset inflation in line with real growth – I know, Christmas is already over, so perhaps this is too much to ask for right now.
Regardless of valuations or over-investment in pockets of the sector, attention and change are definitely good and very much required. Much as I don’t want to see once highly favoured companies turning into pariahs, my real concern is that just as such companies become victims of sudden turns in market sentiment, the same thing can happen to the whole sector, which really doesn’t help anyone.