By Prateek Saxena
In all the different lists of the most lucrative and profitable sectors for investments, the one name that would be common is Fintech.
Going by the simple formula that monetary transactions is something that customers would need irrespective of what the economic condition is, the sector has made itself recession proof and in turn investment friendly. It continues to become an inevitable part of the economy with the involvement of next-gen technologies in its offering set and the customer experience it offers acting as the benefits of Fintech.
In this article, we are going to look into the state of investments in the Fintech domain and which are the important Fintech sectors for investment.
The State of Investments and Rise in Fintech Domain
The market size of the Fintech sector is going to be worth US$26.5 trillion in 2022. For a sector that was less heard of a decade ago has today become one of the most lucrative industries from both investors and entrepreneurs front, while the adoption of Fintech services in finance has become the new norm.
Here is a set of Fintech landscape in 2020 statistics looking into the investment scenario of Fintech and the key aspects which are bringing about this rise in the opportunities for Fintech startups.
Reasons That Make Fintech a Good Investment Avenue
1. Fiat currency is becoming digital
If you look back at how your spendings has changed in the last decade, you will notice the shift in how you conduct transactions and how the majority of your transactions have become cashless through the mode of digital payments in Fintech. Whether it is using PayPass for paying for coffee or using online banking for sending money to friends and family, cash has slowly started becoming a thing of the past.
While on one hand, Fintech companies rely on this shift to keep their platforms in demand, on the other hand, users and investors love the conveniences that this shift offers. And both the reasons are enough for digital payments to become one of the best Fintech sectors to invest in.
2. Data has become the new oil
Fintech brands tend to gather a huge amount of data related to consumers’ spending habits. When used strategically, this data can be applied for filling all the different loopholes present in the traditional financial services.
The one area where it can be most used is bettering the customer experience. It can be used to guide customers on the amount they should spend, save, and invest.
3. Your mobile is your wallet
The time when you had to carry a physical wallet for storing your money is long gone. You can now save your card and bank details in your phone and make payment for goods and services in almost every retail house and service based agencies.
Fintech companies have been at the forefront of this drastic shift towards a wallet-less and cashless world. The mobile wallet applications brands make use of all the right technologies which are needed to make payments efficient and give a great experience to the users – something that innovation is designed for.
4. The social impact
Fintech companies hold the power to serve millions of people around the globe – even in locations which are unbanked. They offer services which change the way businesses are conducted. By bringing transactions on a non-fiat mode, they have the ability to eliminate the black money circulation. These companies also help governments gather taxes, facilitate credit to individuals and businesses in the developing nations. This is also the number one reason why investment in Fintech is on a rise by socially conscious brands.
5. Fintech industry acquirers tend to have deep pockets
A prime characteristic of the Fintech domain is that the Fintech companies’ competitors tend to have deep pockets. The competitors are mainly companies like Mastercard or Visa or banking institutions who look for acquisition opportunities for maintaining their market share or expanding their reach.
The availability of readily-accessible capital in the Fintech domain from such competitors also makes it an industry which is favorable for M&A activity.
The pointers above are a definite sign of why is it right time to invest in Fintech and why to partner with a financial software development company. But having this intention is not enough. It is also mandatory that you know the best Fintech sectors for investment. There are a number of models that have emerged in the financial technology sector but only a few limited ones have emerged as the most profitable Fintech sectors to invest in.
Fintech Business Models That Investors are Betting on for Their Fintech revenue model
According to a PWC report, insurance companies are aware of the Fintech era. There are enough reasons to believe that the insurance sector is heading towards the path of digital innovation.
Venture capitalists who feel that the insurance industry is ripe for disruption and to be a part of the future of finance have started exploring investment opportunities in avenues like social insurances, ultra customizable policies, dynamic pricing based on the new streams of data coming in from the internet-based devices. Going by the trend which is placing Insurtech in the forefront of the positive impact of Fintech on startups, it is one of the best Fintech sectors for Fintech investors.
2. Digital Share Broker
An increased volatility in the share prices have brought a number of new investors in the market. This newfound interest that the share market is getting is a sign of a new culture which needs a platform to understand the basics and perform stock trading in a less risky manner.
This is the reason why brands like Freetrade and Robinhood stock trading app are constantly getting attention from the investors.
3. Cross-border Payments
Although there has been a slight decline in the amount of foreign exchange payments because of cross-border trade limitations that have come into existence because of the COVID-19 rise, it would return.
Meaning, future-centric investors will start backing promising foreign exchange payment companies today. This rise will also bring a demand for greater adoption of cryptocurrencies specific solutions that further eliminates the issues attached with cross-border payments.
The one factor that has been keeping Fintech domain from achieving mass adoption is the presence of a number of regulations and compliances. By the time you understand how to develop a PCI compliant app, you will be asked to follow multiple other policies.
To solve this issue, the sector is constantly finding new ways for improving regulatory compliances. Here are some of the offerings:
- KYC & AML solutions
- Data management solutions
- Tax management solutions
- Trade monitoring solutions
- Portfolio risk management solutions
- Regulatory change management solutions, etc.
Making this expansion possible are the investors backing the RegTech domain. 2015 started with 149 RegTech deals which totaled to $1.1. Billion valuation. The number then increased to 317 deals which amounted for $8.5 billions in 2019. These numbers have also been the reason why the domain is one of the key finance app domains that entrepreneurs are looking to enter.
5. Digital Operating Platform
There is a continuous need for operating platforms which would help bring down the cost and better the efficiency of wealth management, banking, and insurance. In an ode to faster digital transformation, these sectors are looking for ready-made solutions which they can incorporate in their existing systems. Investors too will like to back such solution providers who have a deep inclination towards cloud based operating ecosystems.
6. Online Payment Processing
When we talk about online payment processing solutions, we talk about companies that give the infrastructure needed for processing payments and transferring money from one consumer to another.
The domain is so lucrative that four out of eight renowned Fintech companies fall in this category – Ant Official, Stripe, Klarna, and Adyen.
7. Savings and Budgeting Apps
The current crisis has redefined how we calculated savings, investments, and buying amounts. It has become extremely important to stack emergency funds while allocating funds in other important spending areas.
Customers, for acing this changed formula of budget management have started using applications like Cleo. And the industry has started seeing it as one of the best Fintech sectors for Fintech investors.
8. Peer-to-peer lending Solutions
It is one of those sectors which directly hits the big financial institutions by targeting their most profitable domain – loans. Peer-to-peer lending, as they are commonly called, is an alternate form of finance which connects individuals or entrepreneurs with potential investors.
The chances of getting approved is much higher than banks while the interest rate is also much less. The solutions are aimed at fueling innovation and growth by giving the small businesses the funding which they need for getting projects off ground.
Some of the popular names in this sector include – LendingClub, Lufax, ComonBond, Jimubox, Prosper, and Funding Circle etc.
9. Fraud Analysis Software
Fintech businesses focused on anti-fraud and security with the help of Machine Learning and Artificial Intelligence for finding patterns in the financial transactions which indicate high fraud risk is what the investors are also paying attention to.
Investors have started putting their money behind Fintech companies that offer fraud and security analysis as their service suite.
Two companies that are offering the service impeccably are: Featurespace and Brighterion.
Now that we have peeked into the Fintech landscape in 2020 and which factors are contributing to the maturing of the Fintech sector on investment grounds, let us on a concluding note, look into the Fintech investment trends that will be active this year and for some time to come.
Here are the modern day investment trends in fintech industry, one that is a part of the future of finance.
Fintech Investments Trends 2020
Bigger and bolder deals
With the investors growing focus on late-stage Fintechs, the deal sizes are bound to grow by manifold. In the time to come, high conviction deals that are focused on companies backed by proven business models will be on a rise. We are also bound to see investors attention shifting to companies that hold expertise in multiple sub-domains.
Deals happening in diverse locations
In the time to come, we will see Fintech deals happening in geographical locations that are different from the jurisdictions that fall outside of the traditional markets like the US or Australia, UK. The locations where a high investment activity is expected are: Latin America, Southeast Asia, and Africa.
Inclusion of Big Tech Giants
Through the mode of Google Pay and Apple Card, tech giants like Google and Apple have already started establishing their foothold in the Fintech space. These tech giants in addition to brands like Tencent, Ant, and Alibaba will continue to target developing nations – by directly entering the segment or by forming strategic alliances.
Big Fintechs Will Invest in New/Early-stage Startups
In order to extend their reach in the future of Finance, established Financial agencies will start investing in emerging Fintech brands. The reason behind this would vary from augmenting their capabilities to getting access to skilled talents quickly.
The formation of partnerships would continue to grow between new Fintech companies and big tech players and between traditional companies and Fintechs. These will likely be heavily customer focused and geared towards the creation of more value and greater scalability.
Financial Services’ Re-bundling
In the last decade, we could only only imagine interacting with 1 to 2 financial products. But today, the number has increased to 5-10. The burden of managing these unrelated services has fallen upon the customers and we are not taking it well. This has led to a demand for platforms that would address almost all our financial needs in one place.
Greater Focus on Cybersecurity Products
The attention on cybersecurity-focused Fintech companies would increase as the traditional financial institutes will shift their focus from building the services from ground up to buying them.