Dollar Bills, Financial Thrills and Technological Skills: Investing in the Future of FinTech

25 Mar 2022

Dollar Bills, Financial Thrills and Technological Skills: Investing in the Future of FinTech

The term “FinTech” encompasses an industry that is rapidly growing and refers to businesses that use technology to enhance or automate processes and financial services. 

FinTech reshaped how financial institutions work at their core, as what used to be done manually has now been digitalised, reducing the margin for error to almost zero. Software now handles matters, and partnered with the use of AI and apps, makes everything easier for companies and customers. Furthermore, some parts of the world are entirely cash-free, and many customers now make retail payments via their smart phone through the likes of Google pay or Apple pay. FinTech made payments EASY. 

We wanted to focus this article on investors, the growing FinTech market and its future and key technology.

FinTech and Investors

Due to its growing potential the FinTech industry is attracting a multitude of investors. This is because all investors are ready to take their share of the pie and get a piece of the action. In 2018 and 2019 it was reported that about $140 billion (which includes Venture Capital, Private Equity and M&A activity) was invested into the FinTech space. In the first half of 2020 we saw a decline in investment activity due to the pandemic, and investment was down to $25.6B worldwide for the first half of the year, which put the year on par with 2017. Worldwide fintech investment is about equal to all venture investing in the U.S. over the same period. A third of investments came from Venture Capitals and two-thirds from Private Equity investors in 2018 and 2019. This year, about 85% is coming from VCs since for them, the non-existent revenue common among early-stage companies isn’t a problem like it is for later-stage investors. Those investments are being spread over thousands of companies with the hope of finding the next PayPal or Square. 

Key technology and the Fintech market

Over the next 10 years we will see the fintech market being driven forward by key technologies. 

Progress in technology is the backbone of fintech development and helps drive the competitive landscape of the finance industry. Key technologies that will help drive fintech development over the next decade include:

Artificial intelligence (AI) – the adoption of AI within fintech will lead to greater efficiency on an operational level.

Blockchain – This will disrupt the financial protocols that are already established by allowing chains already established on different protocols to share and transmit data and value across areas such as supply chain management and payments processing. 

Cloud technology – McKinsey research found that by 2030, cloud technology will account for more than $1 trillion across the world’s top 500 companies. The cloud is also shaking up the traditional relationship between financial service providers and customers.

These technologies along with others are becoming more intertwined and are driving forward innovation within the fintech market. This use of new technology within the financial industry means traditional financial institutions will need to up their game to stay on top of the disruption technology will bring to the industry. 

The future of FinTech

While the UK continues to beat European competition in attracting new investment, Ron Kalifa, the chairman of upstart-turned-giant Worldpay, reported an uncomfortable truth. Of all the new financial companies selling shares to fund expansion and innovation in fintech, the US-based Nasdaq index attracted 40% of new listings compared to just 5% for the UK. 

Martin Mignot, a major investor in some of the UK’s most celebrated and valuable start-ups, has recommended a reboot of UK finance is essential in order to avoid becoming complacent. 

As of recently, London has been overtaken by Amsterdam as Europe’s biggest centre for trading European company shares. That business is only a small fraction of the total trading done in London, but European hubs and regulators are keen to prise more financial business away from the UK post-Brexit.

UK regulators are pessimistic that the EU will agree to recognising UK rules as “equivalent” to rules within the trading bloc, which is likely to see more businesses transition out of London to subsidiaries of global banks, which have now moved to the EU.

Ron Kalifa has some recommendations on how the UK can stay ahead of the curve. His recommendations include:

  • Launching a fintech growth fund, which UK pension funds would be free to invest in to stop early stage companies selling to rich foreign competitors too soon
  • Setting up a new retraining programme, which would see further education colleges offering short courses to help workers get to grips with new, essential tech skills
  • Developing 10 new fintech “clusters” located across the UK
  • Enabling high-growth companies to keep special shares, which would leave founders in control even if they sell majority stakes on. This is common in the US but against UK rules

The FinTech industry is exciting and innovative. It will be interesting to see what the industry looks like and how it develops over the next decade.

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Brian Monteith

Brian Monteith

Senior Consultant – Financial Services