U.S. fintech in ‘funding frenzy’, while Africa plays catch up...
Financial Technology has become a trendy investment category with funding tripling to $12.21 billion in 2014, according to Accenture. So fintech is firmly on the VC radar globally, but who are the companies attracting the lion’s share of investment, and how many of them are in Africa?
On the back of impressive growth over the past three years, Financial Technology has become a trendy investment category – attracting some unusual suspects and producing high profile IPOs. According to a report by consulting firm Accenture, The Future of Fintech & Banking, global fintech investment tripled to $12.21 billion in 2014 - confirming that fintech is firmly on the VC radar.
Given that many of the famed poster children of fintech are U.S. based, it’s unsurprising that the U.S. is still the biggest market for fintech VC investment, making up over 80% of the global market. Reports have estimated that in the U.S. alone, there are well over 8 000 fintech startups planning their world domination, with some of those companies valued at more than $1 billion.
So who are these superstars? One of the crowd favourites at the moment is OnDeck, an alternative small business lender. According to Forbes.com, the startup has raised $180 million in equity financing and $300 million in debt. The OnDeck business model is reliant on software that evaluates loan applications within minutes by analysing various data. While banks scrutinise each applying business owner’s personal history (and takes forever to do it), OnDeck makes snappy decisions based on data about the business itself.
Then there is Lending Club, which raised $865 million on the New York Stock Exchange, valuing its business at $8.5 billion (and producing the biggest U.S. tech IPO of 2014). Founded in 2007, Lending Club was the first peer-to-peer lender to register its offerings as securities with the U.S. Securities and Exchange Commission (SEC), and to offer loan trading on a secondary market.
Apart from the alternative lenders, there is a perfect storm brewing in the actual payment services space, not to mention the increasing popularity of crypto currencies. Indeed, Bitcoin companies and exchanges are attracting massive investment from shrewd investors around the world.
‘Silicon Valley is coming…’
So are the big guys worried, given all the cash that’s being funneled into fintech? JP Morgan CEO Jamie Dimon certainly thinks they should be.
"Silicon Valley is coming...There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking,” cautioned Dimon, in a letter to shareholders earlier this year. "The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting. They are very good at reducing the 'pain points' in that they can make loans in minutes, which might take banks weeks. We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense."
Indeed, many fintech startups have already been targeted by financial juggernauts. In January, for example, the New York Stock Exchange announced ‘a strategic investment’ in Coinbase, a bitcoin wallet provider. Financial services giant Northwestern Mutual acquired LearnVest, a fintech startup providing personalised financial planning for women, for a cool $250 million last year.
African Fintech Still in its Infancy
Locally, while there is undoubtedly growing interest in fintech startups and new business models, South Africa remains a long way behind the ‘funding frenzies’ taking hold in the U.S. and Europe.
Willie Krause, Senior Manager of Process Innovation at consulting firm IQ Business, points to a VC environment that is ‘very small’ and not able to provide the big funding mechanisms that U.S. and European startups have access to.
“There might be small amounts of VC funding flowing into local fintech startups, but I don't think it is very significant at this stage,” says Krause, adding that comprehensive research on the African fintech market and associated investment is hard to come by.
“Two of the biggest obstacles in our market are obtaining funding to scale enough to be competitive (not just in the SA market but internationally) and secondly, the legislative environment,” he adds. “It is hard and costly to obtain Financial Services licenses in South Africa…It is easier to develop technology that can then be licensed or sold to other banks or international players.”
The African landscape is rapidly changing, however, and serious investors like Rand Merchant Insurance Holdings (RMIH) and others are creating growth in the industry. As a subsidiary of RMIH, AlphaCode Club is committed to stimulating collaboration and sustainable growth in African fintech.