Fintech is on fire, again. After a slump in funding, the financial technology sector is seeing a flurry of fresh investments — even as deal activity is dropping, noted researchers at CB Insights in the firm’s latest quarterly “State of Fintech” report.
In the 89-page report, CB Insights also identified the top venture capital-backed companies and said there are 66 fintech unicorns that have an aggregate value of $248 billion. Thirty-three are in the U.S. alone and include a variety of financial service providers for retail, health care and banking.
Among the list of unicorns, which are privately owned start-up companies with valuations above $1 billion, are companies familiar to the fashion, retail and consumer products sectors such as Klarna, Affirm, Brex and Kabbage.
And while these unicorns eye potential initial public offerings, the fintech sector is already seeing a good number of firms go public. In the second quarter, Lemonade, the digital renter and home insurance firm; SelectQuote, the online insurance matchmaker, and Shift4Payments, the online POS service provider, all had IPOs. Other public offerings launched included Fusion Acquisition, the “blank check” firm, and NCino, the cloud-based software firm for banks.
The authors of the report said the coronavirus outbreak is giving a boost to e-commerce, which, in turn, is serving as “a tailwind for fintech providers.” CB Insights estimates e-commerce penetration into retail sales will reach 27 percent this year, which is significantly up from the 16 percent share in 2019. The surge is clearly helping companies such as Affirm and Klarna.
Last week, for example, Klarna said it added “one million consumers in the U.S. in just three months, which brings the total number of U.S. consumers to nine million.” The company also said it has seen “strong momentum with its retail partners which have grown by more than 158 percent year-over-year with leading brands such as Sephora, Vans, The North Face, Farfetch, Gymshark, ModCloth, Beautycounter and more.”
Klarna is valued at $5.5 billion. In fashion apparel, the company’s rival in “buy now, pay later” is Affirm, which is valued at $2.9 billion, according to the CB Insights report. Last month Affirm inked a deal with e-commerce platform Shopify to offer “Shop Pay Installments.” Affirm is working with about 6,000 brands, touting Dyson, Warby Parker, and West Elm as among its clients.
Looking at the broader trends in fintech, authors of the CB Insights report said funding in the sector increased 17 percent on a quarter-over-quarter basis to $9.3 billion in the second quarter. “However, monthly deal activity hit a fresh low of 127 deals in April before picking up the pace in June, which saw 141 deals,” the authors said. “Quarterly deal activity continued its steady decline that began pre-pandemic in Q4 ’19, potentially indicating the presence of other headwinds in addition to COVID-19.”
By region, researchers at the firm said Asia was the only continent that did not experience a funding rebound in the second quarter. “North America, Europe, South America, Africa, and Australia all saw an increase in fintech funding [quarter-to-quarter] while funding to Asia-based companies fell 37 percent to $1.6 billion. However, deal activity in all regions was either flat or down [quarter-to-quarter].”
It’s unclear why Asia is lagging in funding. Overall, the continent has been slow to recover from COVID-19 and has not experienced the same investment trends as other places. Several media reports have noted that manufacturing activity in Malaysia, the Philippines and Vietnam slowed in July after a robust rebound in June. For August, it’s expected to show an uptick so business conditions might improve for the fintech firms operating in Asia.
In regard to mergers and acquisitions in fintech, CB Insights said activity is essentially “concentrated within payments/banking infrastructure and wealth tech.”
“Sofi’s acquisition of Galileo and Mastercard’s acquisition of Finicity demonstrates the rush to own banking and payments infrastructure software,” authors of the report said adding that wealth tech had an especially “active quarter with the acquisitions of Personal Capital by Empower Retirement, Folio by Goldman Sachs, and Advisor Engine by Franklin Templeton.”