Coinboard - 2/11/2019 5:51:54 PM - GMT (+0 )
Jonathan Simnett sees M&A as the new R&D for the financial services industrySource - Hampleton Partners
Venture Capital investment into fintech companies rose to around $31bn in 2018, compared with $15bn in the previous year, according to a report by U.K. based Mergers and Acquisitions firm, Hampleton Partners. However, despite some high profile deals involving consumer-facing startups, Hampleton says much of the money is being directed to the enterprise software market.
It probably shouldn’t come as any surprise that fintech is continuing to suck in investor cash. In the consumer market, technology-led companies have already changed the way that customers borrow, bank, invest and transfer money around the world. Or to put it another way, if angels and VCs are looking for businesses with potential to disrupt their chosen markets, then fintech companies that challenge the big institutions fit the bill admirably.
The New R&D
But as Jonathan Simnett, Director and fintech specialist at Hampleton Partners is keen to stress, if you look at financial technology purely through the prism of consumer-facing plays such as Revolut or Transferwise, then you are missing out on a huge amount of activity that is certainly contributing to rapid change in the financial services market, but doing so by catering to established businesses rather than competing with them."
The Hampleton report analyses figures from a range of sources, including 451 Research. And as Simnett sees it , much of the current investor interest in fintech is driven by the requirements of large financial services institutions, such as banks or investment houses. “They need to embrace change,” he says. “But they are not set up to do their own Research and Development. So in place of R&D they are looking at M&A. M&A is the new R&D.”
This in turn provides an opportunity for VC funds to invest in early-stage fintech companies that have the potential to subsequently become the targets for corporate investors - typically, large financial services companies seeking the technologies that will help them improve their processes or customer offerings.
“A lot of fintech activity is taking place away from the public eye,” says Simnett. “It is happening in the the enterprise software market.”
A Regional Market
It has to be said that Hampleton Partners has skin in the game. The company is an M&A adviser and as Simnett explains, it handles matters such as positioning a company for sale, drawing up a buyer list and formulating a valuation.” It’s a role that gives Hampleton a broad perspective on fintech activity, albeit one that is viewed from an M&A perspective.
Despite the global nature of "big finance," Simnett says fintech success tends to be tied to geography. “The fintech market is very regionalised. It tends to mimic the nature of the financial services sector within particular regions and also regulatory frameworks.”
So what does that mean in practice? Well, Simnett cites the example of Europe’s banking market. “Retail bank innovation in Europe is far ahead of the US,” he contends. That is creating demand for fintech solutions companies that will help banks to innovate. In another region, the pattern of demand is likely to be different.
The Cluster Effect
Within Europe, the U.K. remains the biggest magnet for VC investment and in recent years we’ve seen major deals involving poster children for the industry, such as Revolut (banking) and Transferwise (payments).
But the U.K. is, of course, facing the prospect of a no-deal Brexit, which could rip asunder regulatory arrangements currently shared with the rest of Europe. Simnett does not, however, think that the UK startup scene is threatened by this change. “Fintech has become important in the U.K. because of the cluster affect. "Fintech companies have sprung up close to the City of London because it is - by some measures - the world’s biggest financial center. That won’t change.”
Indeed, there may be opportunities for fintech companies that help big institutions deal with any regulatory upheaval. “Regtech” is, after all, an up and coming sector and for good reason. “Any fintech company that wants to make money quickly could do worse than develop a solution that solves a regulatory problem," says Simnett.
Will Fintech investment continue to grow? That remains to be seen, but as things stand, it remains a honeypot for investors.