Raining on the fintech parade: What does fintech investing look like without Asia?

The second quarter of 2016 is finally here, which means that investors across the world have begun the painstaking task of conducting a post-mortem for the previous quarter. CB Insights and KPMG's Q1'16 Pulse of Fintech Report is a welcome relief for any industry investors shaken by the lackluster deal activity in Q4'15: the first quarter of 2016 saw 218 deals (up 15% from the same quarter last year) and $4.9 billion invested in VC-backed fintech companies (up by 96% from the same quarter last year).

However, two interrelated characteristics of this quarter’s growth pattern suggest that investors shouldn’t pop open that sparkly just yet.

Mega-Rounds

The name of the game this quarter was not seed-stage deals or late-stage deals but mega-round funding, with 3 mega-rounds responsible for 54% of VC fintech investment in Q1’16. The size and frequency of these rounds during the quarter invites worrying comparisons.

Mega-rounds cornering over half of the capital supply for the quarter harken back to what happened during the 2012 "Series A crunch", where a lack of capital earmarked for earlier stage investments potentially killed off over 1000 startups.

Relatedly, the companies that managed to procure these mega-rounds will increasingly find themselves in a position of power, not unlike the big banks in America who benefited from the government's "too big to fail" policy enacted in 2008. The fears here are that big fintech companies will get bigger and bigger, smaller startups won't be able to compete, and consumers will be left with very little choice.

Enter Asia

In February 2016, Tradestreaming wrote about about the rise of the Asian marketplace lender. In hindsight, it would seem that 'rise' is an understatement; Lu.com and JD Finance, both Chinese marketplace lenders, surpassed all deals in Q1’16 with $1.216 billion and $1.01 billion respectively, while another Asian online lending giant, WeLab, raised $160M in a Series B funding.

Though the Pulse of Fintech seems eager to keep all investors happy and reassured, the report’s findings show that the only market really experiencing significant growth is Asia. It is Asian fintech deal activity that will put global deal activity on pace to match 2015’s deal high, and Q2’16 promises to keep Asia at the top of the funding list, thanks to the already announced $4.5 billion dollar investment round raised by Chinese online payment service provider, Ant Financial, a spinout of ecommerce giant, Alibaba.

Exit Asia?

When you emerge, dazed and blinking, beyond the bright sheen of Asian investment in Q1’16, you’ll find yourself in the suburbs: the North American fintech scene, where not a lot has changed since the last quarter (for an even more subdued adventure, we invite you to read the Pulse’s section on Europe). Though this quarter saw a nearly 22% increase in deals from Q4’15, the sum of VC-backed fintech investment is identical to the amount amassed in last quarter ($1.8 billion), and Pulse predicts a 10% funding drop in 2016 at the current run rate.

Other discouraging findings for the North America investor include the facts that seed activity reached a 5-quarter low, accounting for only 28% of all fintech deals in North America, while VC-back series B fintech deal share dropped to 14%, down from 21% in Q4’15.

It’s telling that in the Q1’16 Pulse’s introduction to the section on North America, the lexicon is somber, rather than celebratory: lending companies are ‘resilient’ in the face of dropping share prices, but this resilience will be tested by loan practice inquires triggered by the turmoil at LendingClub. Early-stage investors are abandoning the payment space, InsuranceTech has yet to take off, and it’s unclear whether lending platforms will be able to hold on to the diversified investment sources they acquired in Q1’16.

The Future of Fintech North America

Are these trends North American fintech’s swan song? Far from it. After all, VC-backed fintech companies did raise $1.8 billion across a respectable 128 deals this quarter. Moreover, the Asian fintech market also has its challenges. The reverberations of LendingClub’s fumble are present throughout the report, with KPMG's fintech co-leader Warren Mead apprehensive about "recent events at Lending Club and far more worryingly Ezubao, [which] demonstrate that the sector is not without risk", while his colleague, Conor Moore, wonders whether the recent announcements by LendingClub and Prosper will drive consumers back to more traditional financial institutions. These are concerns that Lu.com and JD Finance, both Asian marketplace lenders, will have to contend with.

Nevertheless, what’s clear from the report is that North American VC-backed fintech investment could be entering a bear market. With Asian fintech investments firmly on the rise, a lengthy slowdown in North America would have major implications for investors and companies alike.