VC and FinTech: The Torrid Love Affair Continues

October 23, 2015

Tricia Kemp - OAK HC/FT

Whatever you call it — a love affair or a marriage made in heaven — the dynamite dynamics continue between venture capital and the rapidly growing financial technology sector as new startups emerge every day. And don’t expect any dark economic or political clouds in 2016 to slow the engagement (or honeymoon) as crowdfunding joins venture capital firms as key funding sources.

Investments in FinTech startups quadrupled in 2014, to $12.21 billion from $3 billion according to Accenture, and grew another 50 percent to over $18 billion in this year’s first half, as an increasing number of investors connect with the FinTech ecosystem. The partners in my firm, Oak HC/FT, alone have invested almost $400 million in a dozen pure FinTech companies during the last decade and you can expect the pace at our 16-month-old fund to continue. Goldman Sachs figures the pot of gold at the end of the FinTech rainbow to be worth $4.7 trillion. In short, the FinTech revolution is reshaping finance.

The dramatic rise of FinTech 2.0, as they’re calling this new period of disruptive innovation (which follows the era when billions of dollars were spent on legacy infrastructure) reflects a number of driving forces. They include three big D words — disintermediation, digitization and datalization — along with regulatory changes, cloud and mobile computing and consumer and business expectations led by millennials who expect tech advances to define their world.

Impact of the Three Ds

Disintermediation, of course, reflects the trend of consumers and business owners to rely less on their local bank to provide traditional financial services. FinTech is removing the middleman. Today, as Louis Emmerson, editor of the funding network Symbid noted recently, “We transfer our money using TransferWise, apply for a student loan through SoFi, file our taxes with Simple Tax and manage outstanding payments on Satago.” Small- and medium-sized business owners are doing the same thing or they’re informing their banks to follow suit or they’ll move elsewhere.

Digitization applies to what’s going on in countless back-office and payments operations as financial institutions and their customers automate their operational and payments platforms. And datalization refers to the increasing need to analyze the avalanche of data that more businesses are collecting for any number of purposes — from marketing and customer service to operations and cost-trimming.

As a result, the financial services industry that not that long ago was a Neanderthal in adopting FinTech advances is now more focused on innovation than it’s ever been. Tougher regulatory requirements also are fueling a great deal of the investments. For instance, it’s sparking spending that will continue to strengthen transparency, cybersecurity and data protection. Indeed, one of our two most recent FinTech investments

involves a data science company — Feedzai — that uses real-time, machine-based learning to analyze big data to detect and not simply prevent, but predict fraud. The biggest banks are among its customers, and that wouldn’t have happened a decade ago.

You can expect that traditional financial institutions won’t simply let the upstarts succeed in chanting “bye, bye banks.” At the very least, they are waking up to the realization they must speed up the time to employ new technology to months, not years. A survey of banks by Computer Services Inc. found that 65 percent of respondents planned increases in technology spending in 2015 and just one-half of one percent budgeting lower tech expenses.

Payments Area Booming

The payments segment is where a lot of the action is this year as six of the top 10 biggest deals — of which there were 192 in total — in the first half came in that sector and accounted for 55 percent of aggregate deal value, according to BerkeryNoyes. This summer saw a further surge in giant FinTech deals: Fidelity National Information Services Inc. (FIS) devouring SunGard Data Systems for $9.1 billion; SS&C Technologies completing its acquisition of investment management software provider Advent Software for $2.63 billion and Optimal Payments grabbing digital payments business Skrill for $1.2 billion, among others.

Having spent well over a decade in the FinTech arena, it’s apparent that the spending binge will continue in the payments and lending fields as well as in wealth and personal asset management, insurance, security and back-office operational software advances as the impact of breakthrough digital technologies spreads. And it’s a global, not just a U.S., phenomenon.

The upshot is clear: FinTech is forcing change in business processes and blurring the line between information technology and commerce. At the same time, consumers and business owners increasingly expect their lives to be simpler through continued digital progress — whether it comes from traditional or nontraditional banking sources.

It might still be the honeymoon period, but there’s every indication that venture capital and financial technology are at the beginning of a beautiful relationship.