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Where funding for financial technology is going, in five charts

The appetite for fintech investment in Europe and Asia is growing, according to the latest numbers.

CB Insights’ Global Fintech Report reported Wednesday that investment in financial startups soared 222 percent quarter over quarter in Europe and 89 percent in Asia, while North American investment took a small dip.

Those numbers look big, but the U.S. has the largest financial services market and other regions have generally played catch up to it for years, said Eric Byunn, a partner at Centana Growth Partners, a Palo Alto-based growth equity firm focused on investments in the financial services industry.

“The overall message across all of this is financial services affect the global population and there are a lot of companies with incredibly varied business models and levels of sophistication,” Byunn said. “The opportunity for innovation in the sector is huge and the numbers here all in all only confirm that.”

Here are five charts from the report.

Funding is down, but it’s not a cause for concern

In the first quarter, fintech startups raised $2.7 billion across 226 deals. That’s a 33 percent rise in funding on a quarterly basis but down 47 percent from the same quarter last year. Deal activity increased 12 percent from the fourth quarter of 2016.

At this rate, U.S. deals could fall below 2016 figures
U.S. fintech could see a drop in funding of about 18 percent from 2016, going by the first quarter rate of activity. Startups raised $13.1 billion across 889 deals in 2016. U.S. startups’ first quarter funding activity is just below total funding for 2013. Global activity, however, could surpass 2016 records if the rest of the year keeps with its current pace.

The recent numbers viewed in a long term historical context are very strong, Byunn said, reflecting the recognition by the investment community that innovations have changed and the industry is ripe for opportunity. Quarter to quarter variation is typical.

Insurtech funding has dropped, but recent activity has been consistent
Funding to insurance technology companies — those creating new underwriting, claims, distribution and brokerage platforms, to help insurers deal with legacy IT issues — fell 25 percent from the previous quarter to $194 million, while deal activity fell 30 percent to 23 deals. This time last year, appetite for insurtech firms was much larger, at $770 million across 38 deals.

Payments and billing companies — payments processing companies, payment card developers and subscription billing software tools — took a slight dip from last year with $304 million in funding from $311 million, although total deals rose from 38 to 50 on a year over year basis. The biggest funding activity took place in the fourth quarter, with $495 million in funding for payments over 44 deals.

Bitcoin and blockchain startups rebounded in the first quarter to $113 million from $77 million in the fourth quarter — in large part because of BitFury’s $30 million Series C round and Veem’s $24 million Series B.

For the past four quarters payments and insurtech have had high investment, with blockchain investment hovering in the 100s, which may be partly to do with hype around the emerging technology that doesn’t match up.

That drop in insurtech probably not as alarming as it seems, Byunn said, noting there were some large investment deals that took place just before the first quarter of 2016, like Lemonade’s $13 million investment in December 2015.

Asia and Europe are catching up to North America
At the current rate, Europe fintech deal activity could top 2016’s total by 57 percent, according to CB.

UK fintech companies raised $328 million in the first quarter, including more that $200 million invested in Atom Bank and Funding Circle.

German deals rose 143 percent on a quarterly basis, while funding grew 341 percent, which was largely driven by investments to Raisin and solarisBank.

North America has had and will continue to have the largest amount of investment activity in this financial services startups, Byunn said. Quarter one showed there’s some recognition by global players that they have been slow to invest in financial startups.

“The U.S. has the largest financial services market pretty much any way you cut it,” he said. “You will continue to see increased levels of investment outside North America – not necessarily taking away from North America, but just showing good health outside of it.”

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Top 5 facts about German crowdfunding

Germany has found itself more and more in the global financial spotlight, initially as a result of the possible boons that Brexit could bestow upon Berlin (Talent! Investment! Glory!), and latterly as a result of the U.S. Department of Justice threatening Deutsche Bank’s with a $14 billion dollar fine (Shame! Risk! Possible collapse of economies everywhere!).

However, on a national scale, Germany has some homegrown fintech products that are really coming into their own. Tradestreaming sat down (ok, Skyped down) with Michel Harms, editor-in-chief of crowdfunding.de, to get an eagle eye’s view of Germany’s fast-growing crowdfunding industry. Fair warning: most of the links in this article are in German.

Equity crowdfunding is on the rise in Germany.

Just how fast is equity crowdfunding growing in Germany? Pretty fast. The German business publication For-Gründer reported €37,3 million raised in equity crowdfunding in 2015, up 57% from 2014. In keeping with global trends, real estate crowdfunding platforms have experienced a real surge in Germany, up approximately 80% in 2015 from the previous year, according to For-Gründer, though startup financing is still the clear leader.

Funds raised through equity-based crowdfunding over the last 5 years in Germany.
Funds raised through equity-based crowdfunding over the last 5 years in Germany. Source: crowdfunding.de 

Surprise! German equity-based crowdfunding is dominated by … middle-aged men.

While some predicted that crowdfunding would close the gender gap, crowdfunding is still dominated by men — at least in Germany. Research that Harms published in May 2016 found that crowdfunding is very much the domain of the elite: the group that was most aware of crowdfunding were males, under forty, with higher income and higher education than the average.

It’s not just awareness, it’s users as well. In 2015, two leading real estate platforms in Germany told the Frankfurter Allgemeine that their users were, on average, internet-savvy 55-year-old men, who were able to pay an average initial investment sum of €5000 to €6000. Similarly, German startup crowdfunding platform Seedmatch reported in 2014 that nearly 90% of its investors were male, with an average age of 38, and who had 868 Euros to invest in a startup.

The “Kleinanlegerschutzgesetz”, the first law that gives equity-based crowdfunding a legal framework, actually protects consumers. 

The law, which went into affect in 2015, has a number of provisions to protect investors, including a clause that when investing more than€1000, the investor needs to show that he holds disposable assets of at least €100,000 or that he invests less than twice of his monthly net income.

In The Current State of Crowdfunding in Germany, Harms notes that the law “provides clear guidelines and serves also as a sign that politician recognize the relevance of crowdfunding.”

Most people in Germany don’t know much about crowdfunding, period.

Getting the word out to people who aren’t rich men over forty with a good higher education continues to remain a major challenge for German crowdfunding. Harms suggests that the misuse of the word crowdfunding has sowed distrust among the crowd and that further regulation could help restore faith in the industry.

Germany has one bank that’s doing crowdfunding, but it’s only for internal bank customers, not for the public.

Germany’s Commerzbank launched its own P2P lending platform in 2016 for its customers. “I assume Commerzbank keeps it internal to have more control,” said Harms. “Also to let only a specific type of customers invest — those who are aware and can handle the risk. I don’t know if Commerzbank wants to open that to public. If you have fallout, it will probably affect the brand.”