In 2014, KPMG published a report on the 50 best fintech innovators as selected on the basis of four factors: total capital raised; rate of capital raising; location and degree of sub-industry disruption; and a subjective call from a judging panel on these companies’ products, service, customer experience and business model innovation.
Back then, the excitement was discernible. Global fintech financing had more than trebled in the prior three years and by 2014 was running at an estimated $3 billion annually.
In 2018, venture capital-backed fintechs raised $40.5 billion, though that pace has slowed recently, down to $15.1 billion in the first six months of 2019, so $30.2 billion on an annualized basis. That’s still 10 times ahead of the rate in 2014.
The Centre for Finance, Technology and Entrepreneurship (CFTE) recently went back to that list of 50 leading innovators to review their progress.
Almost all are still going. Only two have fallen by the wayside. This is an astonishing survival rate for venture capital-backed start-ups, where the rule of thumb is that one third (17 companies) should have gone bankrupt by now.
The survivors now employ 30,000 people. One in four of the survivors are unicorns, valued at more than $1 billion based on their most recent funding rounds. Taken together, these 12 unicorns are now worth around $90 billion.
The most successful firms prioritized first customer acquisition and retention, and then focused on finding ways to monetize them, often by using client data, says Huy Nguyen Trieu, co-founder of CFTE.
Credit Karma, for example, uses data it gets while obtaining clients’ credit scores to offer them tailor-made financial products from third parties. It has persuaded lenders to allow it to use their underwriting models so Credit Karma can tell its customers with near certainty whether they’ll be approved for loans before they even apply.
Customers are more likely to apply for a loan if there’s a lower chance of being rejected because they don’t want their credit score impacted by a rejection.
Credit Karma reached 85 million users by the end of 2018 and is now worth around $4 billion.
When it comes to money, centralization is only a virtue in the right institutional environment, which is that of a sovereign entity and a central issuance authority
– Yves Mersch, ECB
Payment firms have fared the best, while peer-to-peer lenders and robo advisers didn’t live up to the hype.
Payment and payment-infrastructure companies such as Square, Klarna, and Stripe found underserved market segments and capitalized on the integration of finance and technology in the growing field of e-commerce.
Square was already five years old in 2014, having been founded by Jack Dorsey in 2009. However, not many people had heard of a company that five years ago offered a credit-card reader merchants could use through a dongle on their mobile devices.
Today, Square has a market cap of $27 billion and millions of businesses use it. It has branched out beyond payments into lending and providing businesses with debit cards.
Stripe, another payments innovator initially favoured by Silicon Valley e-commerce start-ups, is now worth $22.5 billion, up from $3.6 billion in 2014, and has developed partnerships with Uber, Spotify, Amazon, Alipay, Google, Grab, WeChat, Apple Pay and Android Pay.
There seem to be two conclusions from all this.
First, finance will continue to be transformed, in all probability at an accelerated speed, by disruptors deploying new technology as well as by incumbents seeking to learn from them.
Second, this transformation will challenge not just incumbent banks but the guardians of the established order charged with ensuring financial system stability.
Regulators’ fears over Facebook’s Libra project only emphasize their concern over the potential emergence not just of new providers of new financial products and services but of a new financial system.
European Central Bank (ECB) executive board member Yves Mersch told a legal conference in Frankfurt at the start of September that companies such as Facebook can hardly be seen as repositories of public trust or legitimate issuers of instruments with the attributes of money.
“When it comes to money, centralization is only a virtue in the right institutional environment, which is that of a sovereign entity and a central issuance authority,” he said.
“Conglomerates of corporate entities, on the other hand, are only accountable to their shareholders and members. They have privileged access to private data that they can abusively monetize. And they have complete control over the currency distribution network.”
Fintech has benefited users of financial services, but it is now the turn of central banks to feel the hot breath of disruptors on their necks.
And they don’t like it.