Boomtown Accelerators

2022 Opportunities and Threats

By Jason Searfoss, CFO, Co-founder, Boomtown Accelerators

Introduction 

2021 was a banner year for FinTech. FinTech is a sector of innovative and disruptive technologies for providing financial services. It meets the market need for greater access to better financial services at more affordable cost, more security for investors, and greater mobility of financial services products at a faster pace. 

Financial services and related technologies are generally meant to accomplish one of three things:

• provide a method for one party to make payments to another party; 
• borrow at an expected rate of return and invest (including lend) at a higher rate of return, thus earning a spread; and 
• transfer certain risks of contingent events.

Large financial institutions, including banks and insurance companies, are heavily regulated. With these regulations come certain benefits, like being able to borrow from the Fed at attractive rates or being able to underwrite certain transactions that companies only with certain heft could. Faced with the potential for disruption, large banks and insurance companies must innovate, and they have to do so within the confines of the regulatory frameworks in which they operate. This provides an opportunity for startup Fintech companies, which are often free from these regulatory shackles and therefore can – in many circumstances – tackle problems that their corporate counterparts cannot. 

The size of the global FinTech sector was $112.5 billion in 2021, expected to reach $332.5 billion in 2028, a Compound Annual Growth Rate of 19.8% during the forecast period. 

FinTech companies innovate across a broad range of categories – banking, lending, insurance, real estate, cyberassets, investing and wealth management – providing innovations in customer-facing products and services, B2B transactions, and core service provider infrastructure. The industry serves up unique opportunities in mobile applications, digital money, machine learning, and new digital data sources, giving startups the prospect of moving beyond legacy infrastructure and incumbent financial services institutions to create a reimagined way consumers and businesses manage their finances. 

Expansion

As noted, FinTech continues to expand its scope from the days when it was used primarily to securely and efficiently transfer payments from one institution to another. Additionally, on the back end, it was and still is used to process transactions to include confirming and reconciliation of these transactions with the prime brokers and/or custodians. Also extensively growing is the ability for FinTech to provide risk information in a timely manner to assist in portfolio management and other functions. 

The highly-regulated nature of financial services is not something to be understated. .  While generally smaller FinTech companies have much broader freedoms, the matching of their tech to a highly-regulated institution is a challenge as the resistance to change is steep. Even with that, the aim of FinTech – more so than certain other sectors where innovation is ripe for development – is disruption. It’s well positioned to be a threat to, challenge, and usurp traditional financial services and the status quo. 

Potential for Disruption 

That means traditional financial institutions face great risks by undervaluing FinTech’s real potential for disrupting their legacy position.  FinTech’s explosive growth and increasing importance also creates system-wide threats to existing infrastructure. While it brings consumers potentially wider access to better services, it disrupts core financial services for providers – most especially banks – requiring them to innovate to remain relevant. 

Headwinds 

While the opportunity in FinTech is enormous, 2022 so far has ushered in some headwinds. In Q1, funding for FinTech companies fell 18% quarter-over-quarter to $28.8 billion, according to data from CBInsights. The number of $100M+ mega-rounds continued to decline in the first quarter, dropping to 75 deals totaling $16.3 billion. Funding to Asia-based FinTech companies sank to $4.8 billion, down 44% from $8.5 billion in the fourth quarter of 2021. 

But there were also high notes for the sector. The number of closed deals reached a record-high of 1,399 — up 7% over 4Q 2021, CBInsights said. Each of the past five quarters saw the minting of 30-plus new FinTech unicorns globally — massive growth compared to any quarter prior to 2021. FinTech startups are drawing significant funding from non-VC investors, including asset & investment managers, CVCs, and angel investors.

Additionally, it’s important to keep in mind one mitigating factor in light of Boomtown’s investment thesis: Much of the funding pullback has happened at the later stages, whereas we work with earlier stage companies, where the decline has not been as sharp. Now that markets have entered into bear territory, FinTech isn’t alone in posting declines. It’s fair to acknowledge the current climate is a sharpening contrast with 2021, when financial services was the leading sector for venture capital, with $134 billion invested, according to Crunchbase. 

Numbers

There were 26,346 FinTech startups globally in November 2021, breaking down regionally as follows: the Americas, 10,755; Europe/Middle East/Africa, 9,323; and Asia/Pacific, 6,268, according to Statista. 

Ongoing Trends 

Three noteworthy trends are contributing to the development of the FinTech sector: 

First, the new technologies that are fueling innovation in FinTech, such as those in AI and cybersecurity are, themselves, maturing.

Second, many funds that invested in the first generation of FinTech companies that tried to capitalize and build upon the financial crash of 2008 are reaching the end of their life cycles, and thus preparing to return money to their investors. 

Third, the macroeconomic climate, particularly in the U.K. (one of the most advanced FinTech markets) and Europe has deteriorated, slowing down funding to younger and newer companies there but leading to more opportunity in developing countries, especially in Asia, Africa, the Middle East, and Latin America. The developing world, with a large un- and underbanked population, provides a very fertile ground for rapid growth of FinTech.

Looking Ahead

Here’s a summary of research by KPMG on what’s coming: 

1. Even with the current market upheaval, there will be continued interest and investment in cryptocurrencies and blockchain technology. Right now the modern financial services system is still discovering what role crypto will play. Indeed the crypto meltdown in the first half of 2022 has caused some to question its viability going forward; 
2. Stronger partnerships as financial services extend into a broader range of daily transactions through the use of embedded banking, insurance and nontraditional financial products; 
3. An increasing focus on core banking systems as banks see that legacy infrastructure is holding them back from truly moving forward;  
4. The expanding reach of FinTech into the farthest and most under-served regions of the world, including Africa, Southeast Asia, and Latin America; 
5. More global opportunities as corporates and VC investors look all over the world for the right FinTech opportunities and deals. 

 

Note: Data and material gathered by Tripp Baltz, Head of Research, Boomtown Accelerators 

References