- Fintech is the most valuable industry in the venture capital space. Five of the top 10 firms are in emerging markets
- Funding access is key to fintech success; it enables firms to build technology, achieve scale, comply with regulations
- VC fintech investment was US$42bn in 2019; the 2020 run rate is US$40bn. Payments and lending firms are key recipients
In this report, the latest in our series on the emerging market fintech space, we analyse the industry’s funding trends. We also gauge the importance of funding for fintechs, drawing on the results of our proprietary survey of 101 fintech firms across seven emerging markets — Brazil, China, India, Indonesia, Kenya, Mexico and South Africa.
Summary of our key findings
The fintech sector accounts for 22% of the total value of global unicorns, coming in ahead of all other industries, including e-commerce.
Fintechs regard access to funding as the most important success factor after achieving first-mover advantage.
In 2019, venture capital-backed fintech funding amounted to US$42bn. Funding has remained resilient this year despite the challenge of Covid-19, with 9M 2020 flows standing at US$30bn.
North America has been the biggest recipient, absorbing around half of world’s fintech funding flows in 2019, with Asia and Europe accounting for around 20% each.
By sub-sector, payments and lending fintechs together receive around half of global fintech funding flows; this proportion rises to over 80% for emerging markets.
In terms of investors, most of the top venture capital firms investing in fintechs are based in the US, with a minority headquartered in Europe.
Tech giants like Alphabet and Tencent are also active investors in the fintech space.
Source: PitchBook, KPMG, Hurun Research Institute, Tellimer Research
Funding is a crucial ingredient in the development of fintech ecosystems; it allows firms to meet regulatory requirements, invest in infrastructure, build networks and carry out marketing. According to our survey, fintechs regard access to funding as the most important success factor after achieving first-mover advantage. Funding can also help fintechs clear the most challenging regulatory hurdle they face, which relates to capital requirements.
In 2019, venture capital-backed fintech funding flows amounted to US$42bn. These flows have remained resilient this year despite the challenge of Covid-19, with 9M 2020 flows standing at US$30bn (down 5% yoy). North America has been the biggest recipient of these flows, absorbing around half of world’s fintech funding flows in 2019, with Asia and Europe accounting for around 20% each. By sub-sector, payments and lending fintechs together receive around half of global fintech funding flows; this proportion rises to over 80% for emerging markets. Insurtech is also gaining strong traction.
Drilling down to the company level, Gojek in Indonesia tops the global fintech funding list in 2020, raising US$3.0bn, despite challenges posed by Covid-19. Globally, most of the top deals are in the US. Focusing on emerging markets, the largest deals are widely spread, with Latin America and Southeast Asia featuring strongly.
In terms of investors, most of the top venture capital firms investing in fintechs are based in the US, with some others headquartered in Europe. Tech giants are also active investors in the fintech space.
The fintech sector has a higher private equity valuation than any other industry
Although fintechs have yet to establish a meaningful presence in listed equity markets (with Ant Group’s IPO suspension vividly highlighting some of the challenges being faced), it is a different story in the private equity space. As at August 2020, there were 586 unicorns globally, according to Hurun Research Institute (with a unicorn defined as a start-up company valued over US$1bn). Looking at the sectoral mix of these unicorns, fintech comes top in terms of valuation, accounting for 22% of the global total. In terms of the number of firms, the fintech sector has 63 unicorns, accounting for 11% of total fintechs, ranking second to e-commerce, which has 89 unicorns.
The average fintech unicorn is valued at US$6.4bn
Looking at all sectors with a minimum of 20 unicorns, individual fintech firms are the most valuable, with an average valuation of US$6.4bn. The sector also comes first if we consider median valuations.
Most fintech unicorns are in the US, China and the UK
There are 63 fintech unicorns with an aggregate valuation of cUS$400bn. China’s 18 fintech unicorns contribute about 60% of this figure, helped by Ant Group, which alone is valued at US$150bn (38% of the global total). In terms of the number of unicorns, the US leads with 21 firms (33% of total) having a combined valuation of US$85bn. Notable emerging markets include India (3 unicorns with US$21bn valuation) and Brazil (2 unicorns, US$11bn).
In the table below we present the most valuable fintech unicorns. Ant Group is by far the largest company, and five of the top 10 names are based in emerging markets. In contrast to Ant, Lufax, the second most valuable firm, has been able to successfully transition to becoming a public company; its current market capitalisation is US$38bn.
The importance of funding for fintechs
Access to funding is crucial to building a sustainable fintech franchise, for various reasons:
Regulatory capital requirements are an important consideration for fintech start-ups. Financial supervisors often require firms to maintain capital and liquidity cushions to reduce systemic risks.
The cost of building technology and networks is considerable; funding is essential to this investment.
High marketing spend is often needed to boost credibility and build the customer base. This expenditure often takes the form of discounts and promotions, meaning that products are effectively being sold below cost.
Winner-takes-all industry dynamics. Scale efficiencies mean that markets can be dominated by a small number of industry leaders. Our industry surveys indicate that first-mover advantage is a key driver of success, but maintaining this advantage typically requires heavy spending on technology, marketing, distribution, recruitment, product development etc to maintain momentum.
Funding is an essential driver of fintech success
Our EM industry survey indicates that funding is one of the main success factors for fintechs, coming after only first-mover advantage. It is more important for fintechs in Indonesia and Mexico and those operating in the blockchain and lending segments.
Funding can help mitigate hurdles to fintech growth
Our survey indicates that capital requirements is the top regulatory hurdle faced by fintechs, particularly those in Brazil, India and China and those in insurtech and investech segments.
Funding is also cited as the third most important growth constraint for fintechs, after market dynamics and competition from the informal sector.
Fintech funding – North America dominates, but Latin America and Africa are fast-growing
In 2019, venture capital-backed fintech funding flows amounted to US$42bn, as per CB Insights. North America is the biggest region, receiving around half of world’s fintech funding flows, while Asia and Europe account for 20% each.
Another data source, PitchBook, includes M&A activities along with venture capital funding and the total funding size is cUS$140bn, indicating that M&A activities are almost double the VC funding. The data shows M&A activity is more prevalent in Europe (US$50bn in 2019) than in Asia (US$4.1bn), which may reflect a more uniform regulatory environment in the former.
Note that China accounted for only 4% of global fintech funding and deal-flow in 2019; this proportion was close to 30% in 2018, boosted by Ant Group’s US$14bn funding round in that year.
Over the past four years, global funding flows have grown by an average of 30% pa. Growth has been strongest in South America and Africa, but both these markets remain very small in a global context.
Looking ahead, we would expect funding flows to emerging markets to exhibit the strongest growth. For example, banking penetration stands at 55% in South America and 43% in Africa compared to global average of 69%; fintechs can exploit product gaps to address the needs of financially-excluded/underserved communities. Comparing fintech funding flows relative to economic activity also supports an argument for more capital to flow to EM firms. While some investors may prefer backing US firms on the basis that they can achieve global domination, we note that fintechs are subject to widely varying local regulatory frameworks, which can effectively frustrate such ambitions (as, for example, Facebook has learnt its cost when looking to roll out its EM payments platform)
Payments and lending are investors’ favourite fintech segments
Based on CB Insights data, the payments and lending segments together receive around half of global fintech funding flows. This is even more pronounced in the case of emerging markets, where these two sectors accounted for 80% of total funding flows in 2019 (note that the data is skewed by Paytm’s US$1.7bn funding round in India). Insurtech is gaining strong traction globally, though less so in emerging markets.
Fintech funding has been resilient during Covid-19
2018 and 2019 were mega years for fintech funding. Covid-19 has brought a slowdown, but not as steeply as some commentators initially feared. Considering fintechs are some of the key beneficiaries of Covid-related changes in the way economies are operating, we think fintech funding flows should remain strong.
Top funding deals over the past year
Indonesia's Gojek tops the list, raising US$3bn in 2020 despite challenges posed by Covid-19. Globally, most of the top deals are in the US while the list is diversified in EMs with Latin America and Southeast Asia, relatively bigger than South Asia.
Who is investing in the fintech sector?
The top three investors in the sector over the past year are Sequoia, 500 startups and Ribbit Capital. Seven of the top 10 venture capital firms investing in the sector over the past year are based in the US, with the remaining three headquartered in Europe. Key emerging market recipients of their investment include BankBazaar (India, lending), Nubank (Brazil, digital bank), Rupeek (India, lending) and MamoPay (UAE, payments).
Big tech platforms are also actively investing in fintechs, with Alphabet (Google) and Tencent leading the charge. Google is actively expanding its digital banking offerings. It has recently partnered with several banks in the US to enhance the capabilities of its Google Pay platform, which now includes the ability to open a bank account, make P2P transfers and manage personal finances through enhanced features like spending summaries.
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