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Fintech by the numbers
Incumbents, startups, and investors adapt to fintech evolution
From disruptive threat to enabling partner, fintech has entered a new phase of its evolution. Our insights track the development of the fintech market and examine how banks, insurers, and investment management companies are tackling fintech transformation initiatives.
Closing the gap in fintech collaboration
As fintechs mature, incumbent financial institutions expect more from them, demanding practical solutions that address specific problems rather than “cool” but generic ideas. Understanding the current state of the fintech market and learning how to engage and collaborate with these tech-driven startups can enable innovation that drives true transformation and differentiation in the marketplace.
However, challenges remain that can hinder collaboration, including internal organizational and cultural issues and external issues such as regulation, lack of industry-specific expertise, and difficulty demonstrating a clear value proposition. To address these challenges, incumbents need to determine how they will measure success and establish a faster, systematic collaboration process. At the same time, fintechs need to hone their knowledge of the business of financial services and establish a clear value proposition.
While most incumbents seek more advanced fintechs, innovative ideas from new startups might provide a fresh perspective that could have dramatic impact. As the fintech ecosystem evolves, a more symbiotic relationship is beginning to emerge. Fintechs are typically free from the internal and external issues incumbents face, and incumbents can supply much needed capital and the institutional knowledge fintechs need to develop innovative solutions to real problems.
The relationship between incumbents and fintechs will continue to evolve—likely at an accelerated pace—as fintechs continue to drive transformation for FSIs. To advance collaboration, financial institutions and fintechs need to be more open-minded, tolerant, and accommodating and understand the mutual need for coexistence and codependency.
Fintech by the numbers
In the past few years, we appear to have entered a new phase in the evolution of the financial technology sector. The thinking of many financial institutions has evolved, and they're now seeking to team more with emerging technology companies to gain access to new markets and products, greater efficiencies, or just the "secret sauce" that makes innovation go. At the same time, many fintechs themselves have sought to join with large financial institutions to expand into new markets, gain industry and regulatory knowledge, and even simply cash out.
There are countless articles and reports about fintechs these days, but how much of the analysis is grounded in fact? And how much is mere speculation? We wanted to understand the evolving ecosystem with data as the foundation. In particular, we were interested in the nature, type, and scale of engagement between fintechs and both investors and traditional financial institutions.
To understand which businesses and solutions were gaining and losing, we analyzed the pace of new company formation, amount and type of investment, and the most meaningful geographic regions for fintechs. Our key findings include:
- New company formations are in decline over the past two years
- Funding in many categories is still on the rise, especially in certain banking and commercial real estate categories
- New funding sources are emerging, suggesting that we're entering a phase of consolidation and maturation
- Fintech acquisitions and initial public offerings (IPOs) are also ramping up
- There continues to be meaningful regional variability in fintech creation and investor interest
InsurTech entering its second wave
Even though startup activity in insurance has slowed, InsurTech will continue to play a major role in shaping the future of the industry. How can insurers adapt to these changing times and better leverage InsurTech to speed up innovation and digital transformation?
InsurTechs are looking to carve their own niche in the emerging digital insurance marketplace by catering to evolving customer needs and rising expectations. Many incumbents are often helping to finance experiments by InsurTechs—which would at first appear to be competitors—in part to likely learn about the digital marketplace and perhaps complement their own more traditional business models.
Yet a majority of InsurTechs aren't seeking to compete with, let alone displace, incumbents. Instead, most are being launched to help solve legacy insurer problems across the organization, from general operations inefficiencies to enhancing underwriting, distribution, and claims functions. Insurers can leverage InsurTechs to speed up innovation and the digital evolution, integrating the newcomers' next-generation technical capabilities and entrepreneurial culture to become the digital insurers of the future.
InsurTechs could ultimately accelerate the transition of incumbents to become more customer-centric, data-driven, and multi-platform-based. InsurTech innovation can help stitch together capabilities across the insurance value chain so carriers are better able to meet the needs of consumers, agents, and brokers.
By collaborating with InsurTechs, we think traditional insurers may be able to more quickly and efficiently innovate in their approaches and operations to take advantage of four strategic options made possible through digital transformation:
- Delivering ahead of customer expectations
- Accessing new markets and segments
- Shifting from purely underwriting risk to providing more comprehensive well-being (in terms of physical and financial security)
- Reimagining the operating model to generate higher profitability
Deloitte’s fintech interactive tool—newly updated!
Are you a leader, manager, or analyst in financial services or fintech? View Deloitte’s fintech interactive tool to stay updated on changes in the fintech market. This interactive tool tracks competitive investment intelligence across banking and capital markets, insurance, investment management, and real estate.
Here are some notable trends from 2018 that we’ll continue to track this year:
- Only 11 VC-backed fintechs were launched, versus 178 in 2017.
- Although startup activity declined, investment reached an all-time high of $60.2 billion, with VC funding accounting for 67%.
- China saw more fintech investment at $23B, than any other country, surpassing the US for the first time. Ant Financial’s Q2 mega-round accounted for nearly 60%.
- M&A volume was down 10% year over year.
- IPO volume was also slightly down, and Adyen’s $1.1B in IPO proceeds—the largest of 2018—represented roughly 30% of the total.