Industry focus
FinTech deals
in focus:
What does
COVID-19
mean for
FinTech
investors?
Attractive targets
and an exciting
outlook for
FinTech investors
The long-term outlook
for the FinTech sector
remains highly favourable
for investors despite the
effects of COVID-19.
We expect to see FinTech
growth accelerate over the
coming months and years
and, with that, a significant
increase in investment into
the market behaviours
that will be beneficial to
FinTech growth.
The pandemic has underscored the importance of
FinTechs to the financial services sector globally.
It has highlighted an urgent need for incumbents across the
financial services value chain to innovate through partnership
with FinTechs. Many financial services providers have seen
COVID-19 put further pressure on margins and FinTechs can
provide an array of attractive solutions to alleviate this pressure.
We have also seen a crystallisation of certain consumer
and business behaviours that will be beneficial to FinTechs
in the future.
Many of these behaviours revolve around digital products,
services and solutions, and some FinTech sub-sectors
such as payments, should benefit from the accelerated shift
towards a cashless economy, notwithstanding some shorter
term pressures from lock downs. Also within various FinTech
sub-sectors, we continue to see increased penetration of
operational simplification & automation tools, specifically
configured for the complexities of the financial services
end markets.
COVID-19 has driven market uncertainty which dealt a
heavy blow to FinTech deals – with significant contraction
in activity and investments in H1 2020.
Despite this immediate uncertainty, FinTechs in many
sub-sectors remain attractive targets. In particular, there
are a number of sub-sectors which have remained largely
resilient to the pandemic and should continue to benefit from
significant opportunities, including: core financial services
market infrastructure and software platforms, capital market
/ trading platforms, ecommerce payments, KYC / AML and
other regulatory & governance software and data management
& analytics software.
Furthermore, the policy environment is becoming more
supportive for FinTechs.
We have seen this with HM Treasury’s announcement of a
sector review in the UK, recognising the role FinTechs have in
supporting the sector’s recovery and future success. As the
UK and Europe start to recover, we remain excited about the
outlook for the European FinTech deals market and expect
it will be one of the areas that sees the fastest recovery
post-COVID-19.
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
What does ‘FinTech’ really mean?
The financial technology - or ‘FinTech’ - sector consists of a wide range of technology-driven and technology-enabled
businesses. They have either a financial services or technology background, and broadly align to a financial services
sub-sector.
Ranging from established financial services software vendors to emerging digital service providers, FinTechs deliver
efficiency gains, reimagine customer experience and disrupt incumbents’ business models.
While a wave of FinTechs have emerged to challenge traditional service models and processes in specific sub-sectors,
others have moved towards developing integrated ecosystems and customer solutions, underpinned by modular
technology platforms across the value chain.
For more information, read our article on FinTech deals and landscape trends.
Emerging
Scaling
Mature
Ecosystem
5
Enterprise value
2
‘Ecosystems’
• Amazon
• Facebook
• Google
• Ant Financial
Scale-ups
1
4
Early stage,
VC backed start-ups
Classic FinTechs
• Mastercard
• Visa
• FIS
• Finastra
3
FinTechs with
proven economics
Maturity
1
2
3
Refining and testing of
new ideas, and prepping
for seed/series A/B
investment from VC funds
Establishing brands
and some with proven
economics. Later stages
of funding (series D-F)
or with direct growth
capital investment
More mature, established
companies with
proven economics
Strategy&
I
3
4
5
Traditional financial
technology providers, long
term established companies
Big Tech and social media
platforms which are both
potential buyers of FinTechs
and market entrants
Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
3
COVID-19 and the
growing case for
FinTech investment
The COVID-19 pandemic has delivered unprecedented shocks to the global
economy and public finance, abruptly halting the 10-year bull run. While the UK
and the rest of Europe continue to combat COVID-19, significant uncertainties
remain and attention is also returning to Brexit.
As with most businesses, many FinTechs have been adversely impacted by
COVID-19. Sub-sectors such as point-of-sale payments and consumer credit
have been among the hardest hit, albeit activities are starting to rebound.
Other sub-sectors have remained largely resilient to the pandemic, including:
core financial services market infrastructure and software platforms, capital
market / trading platforms, ecommerce payments, RegTech, data management
& analytics, and governance software.
As with most
businesses, many
FinTechs have been
adversely impacted
by COVID-19.
However, FinTechs
in some sub-sectors
have remained
largely resilient.”
Our indicative view below shows that the long-term outlook for the FinTech sector remains positive, despite
the short-term shock COVID-19 delivered to a number of sub-sectors
Impact on selected FinTech verticals
Challenged
Flourishing
Long-term prospect
Point-of-sale card
payment services
Int’l payments
/ remittance
Neo-banks
On-demand
insurance
Core FS SaaS platforms
(e.g. banking, wealth)
Digital lenders
(consumer)
Digital lenders (SME)
Challenged
ecommerce
payment services
RegTech
D2C fund
platforms
Data mgmt.
& analytics
Short-term impact
While the near-term shock and ongoing market uncertainty have dealt a
heavy blow to FinTech deals, the long-term outlook remains highly favourable
for investors. In part, this is because the pandemic, for all its disruption,
has created an urgent demand for the benefits FinTechs can provide and
has dramatically accelerated trends that were already driving their growth.
Moreover, the policy environment is becoming more supportive for FinTechs,
as seen with HM Treasury’s recent announcement of a sector review in the UK,
recognising the role they play in supporting the COVID-19 recovery and their
importance to the future of the financial services sector.
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
Flourishing
Number of UK FinTech deals
Innovate Finance)
UK FinTech fundraising
N u m ber of U K Fi ntech d e a l s
Num
ber o Strategy&
f U K Fi ntech
deals
(Source:
Analysis,
U K F i n t e c h f un d r a i s i ng (£ ’ b n )
U
K Fi nt e c h f u nd r a i s i n g (£ ’ b n)
(£bn)
19
19
14
14
1.7
1.7
12
12
Q1
Q1
Q2
Q2
N
u m ber ofof
UK
Gl Global
o b al F i nFinTech
t e c h d e a ldeals
s ( i n c l .(incl.
VC)
Number
UK
Num ber o f U K Gl o b al F i n t e c h d e a l s ( i n c l . VC)
Q1
Q1
VC)
G
l o b a l VVC
C FiFinTech
nt e c h f u nd
i n g (£ ’ b n )
Global
funding
G l o b a l V C F i n t e c h f un d i ng (£ ’ bn )
(Source: CB Insights)
831
831
(£bn)
7.1
7.1
7 33
7 33
716
716
6.1
6.1
513
513
Q1
Q1
2 0 19
2 0 19
1.1
1.1
8
8
Q2
Q2
Q1
Q1
2020
2020
The impact of COVID-19 on FinTech deals
FinTech has become the fastest-growing sector of the economy in recent years,
and the UK has one of the world’s most vibrant FinTech scenes – a record total
of around £3.8bn of funds were invested in UK FinTechs in 2019 – up around
38% on 20181.
Deal volumes fall
However, within the space of a few weeks, the COVID-19 pandemic halted
virtually all prospective deals and many ongoing ones, with no timings provided
on a potential return, and it has also forced the renegotiation of the few that
did complete. Corporate buyers have been hamstrung by business disruptions
while financial sponsors, such as private equity and pensions funds, are being
held back by continued uncertainty. Processes in the early stages have slowed,
taking significantly longer to negotiate and complete, and new processes have
been delayed or aborted. While debt markets are still open for pending deals
and quality businesses, they are largely closed to new processes. At the same
time, there has been an increased preference for B2B FinTechs over B2C.
Over the first two months of the lockdown, we saw the majority of financial
sponsors delay new deals and focus instead on helping their existing
portfolio companies. Moreover, FinTechs were put off from new processes
as the pandemic put any growth plans and valuations on hold in an instant.
However, private equity investors now have plenty of dry powder and have
recently started returning to the market.
1 Innovate Finance Q1 2020 FinTech investments data, 1 May 2020
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Industry focus – FinTech: FinTech deals in focus: What does COVID-19 mean for FinTech investors?
5
Valuations have become erratic,
especially due to concerns around the
longer-term impact from COVID-19.”
Valuations become more challenging
Before the pandemic, the FinTech deal space was very competitive and
valuations were high in many situations. That trend dramatically changed
with the escalation of COVID-19.
While some, such as Revolut, managed to raise funds just prior to the onset of
the pandemic, others found themselves needing to raise fresh capital amid the
crisis. A small number has held out against the impact of COVID – particularly
those focused on online payments, such as Checkout.com – and benefited
from an influx of capital towards ecommerce.
Valuations have become erratic, especially due to concerns around the
longer-term impact from COVID-19. FinTechs are also being challenged harder
than ever on their business plans as negotiating power shifts towards the buy
side in a less-crowded deal market. As a result, many FinTechs have been put
off deals in the short term to focus on stabilising operations and returning run
rate to pre-COVID levels.
%
Impact of COVID-19 on valuation
Impact of COVID-19 on valuation
(Source:
PwC Raise Investor Survey March and June 2020)
48
36
30
24
19
17
10
No change
March
6
Strategy&
6
6
4
10% reduction
20% reduction
30% reduction
June
I
Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
30%+ reduction
Valuation challenges
Valuation implications
• Uncertainties around the development of the pandemic
(e.g. potential second wave, development of vaccine
and treatments)
• Uncertainties around macroeconomic conditions
• Uncertainties around the shape of the
post-COVID market
• Unpredictability of short to medium-term trading
and operations
• Uncertainties around the attractiveness and
sustainability of the target’s existing products and
business model
• Concerns over the adequacy and relevance of historical
market data and performance data
• Increased volatility in the public market and lack of
comparable deals in the private market
• Less crowded / competitive deal market
• Greater adjustments to forecast earnings
and cash flows
• Greater use of scenario and sensitivity analysis
• Increase in discount rate / expected rate of return to
reflect greater risks
• Widening of valuation range
• Negotiating power shifts to the buy side
A positive outlook for FinTech deals
We are already starting to see an uptick in deals activities and, as outlined above,
a number of FinTech sub-sectors will remain very attractive.
In the near term, we expect to see a flight to scale with buyers focusing primarily
on established targets with scalable products, established client bases, proven
economics and strong balance sheets. Corporates and financial sponsors with
existing FinTech portfolios may also benefit from distressed assets, which could
offer consolidation opportunities.
The changes brought by the pandemic have vastly accelerated the pace of digital
adoption among consumers and businesses alike. This has served as a catalyst
for incumbent financial services companies to reassess their legacy operations
and technology infrastructure. Moreover, it has highlighted the importance of
FinTechs to the resilience of the financial system. Therefore, we remain upbeat
about the outlook for the FinTech deals market and expect it to be an area that
sees the fastest recovery post-COVID-19.
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
7
Financial services
sub-sectors in focus
In this section, we look at a selection of areas within individual financial services
sub-sectors to assess the issues and opportunities particular to each, and
discuss what they mean for FinTechs and investors.
Banking and lending
With a significant contraction in business activities and consumer spending
while credit losses mounted, the pandemic exacerbated the growth
challenges and margin pressure already faced by financial institutions.
This has highlighted the urgency for banks to accelerate transformation
by adopting greater innovation.
What does it mean for FinTechs?
Neo-banks have grown rapidly to around 20 million customers in the UK.
While most struggle to turn a profit, the pandemic has helped accelerate
consumer adoption of online banking. Starling Bank, for example, saw around
30% growth in app downloads2. COVID-19 has also increased demand for
small business loans, creating near-term opportunities.
Nevertheless, the slowdown in the economy still prompted neo-banks to cut
back on growth plans and cost base in the short term. In the longer term,
they must address the challenge of becoming a customer’s primary bank
account to unlock greater value.
Digital lenders are facing margin compression with declining consumer
lending and the implementation of payment holidays. The retail segment
has contracted as consumer spending and borrowing declined sharply.
However, some digital lenders have tapped into the opportunity to provide
small business loans, both directly and through the government schemes,
such as Funding Circle, MarketFinance, Iwoca and many others offering
Bounce Back Loans and Coronavirus Business Interruption Loan Scheme
(CBILS) support. This is expected to provide a short-term boost; however,
the quality of the loan book may degrade if the pandemic persists.
2 https://thefintechtimes.com/starling-bank-wins-covid-with-a-shed
8
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
30%
growth in app
downloads
observed by
Starling Bank2
Net monthly change in consumer credit lending
Net monthly
in consumer
credit lending
Jan
2019 – change
May 2020
(seasonally
adjusted) (Source: Bank of England)
£1bn, Jan 2019 – May 2020 (seasonally adjusted)
Billions (£)
Billions (£)
Net2000
monthly change in consumer credit lending
£1bn, Jan 2019 – May 2020 (seasonally adjusted)
0
2000
-2000
0
-4000
-2000
-6000
-4000
-8000
Mar
May
Jul
-6000 Jan
2019
2019
2019
2019
-8000
Jan
Mar
May
Jul
Net monthly
in household 2019
deposits
2019 change 2019
2019
£1bn, Jan 2019 – May 2020 (seasonally adjusted)
Sep
2019
Nov
2019
Jan
2020
Mar
2020
May
2020
Jun
2020
Jul
2020
Sep
2019
Nov
2019
Jan
2020
Mar
2020
May
2020
Jun
2020
Jul
2020
Net monthly change in household deposits
30000
Net
monthly
in household
deposits
Jan
2019
– change
May 2020
(seasonally
adjusted) (Source: Bank of England)
Billions (£)
Billions (£)
£1bn, Jan 2019 – May 2020 (seasonally adjusted)
20000
30000
10000
20000
0
10000
-10000
0
-20000
Mar
May
-10000 Jan
2019
2019
2019
-20000
Jan
Mar
May
2019
2019
2019
Jul
2019
Sep
2019
Nov
2019
Jan
2020
Mar
2020
May
2020
Jun
2020
Jul
2020
Jul
2019
Sep
2019
Nov
2019
Jan
2020
Mar
2020
May
2020
Jun
2020
Jul
2020
Core banking platform providers are largely resilient but business
development, traditionally conducted in-person, is expected to decline in
the short term. Nevertheless, post COVID-19 there should be considerable
opportunities for core banking platforms and other specialised banking
technology vendors, such as data and analytics and RegTech, as the
pandemic has highlighted the urgent need for banks to transform legacy IT.
What does it mean for FinTech investors?
Core banking platforms and software vendors remain attractive opportunities
and investors should start to engage potential targets while the market remains
relatively quiet.
There are opportunities for traditional FinTechs, for instance large core banking
platform vendors, to pursue tactical acquisitions such as the consolidation of
specialist or regional providers, or distressed companies.
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
9
Insurance
In the insurance sector, the pandemic has not only brought commercial and
operational challenges but it has also highlighted the limitations of policy
coverage, and customer understanding of these limitations, prompting the
FCA to introduce guidance.
What does it mean for FinTechs?
Price comparison websites are the most important distribution channel for
personal lines insurance policies, accounting for around 75% of new car
insurance policies and 59% of new home insurance policies. While they have
not been spared from a decline in business volume, some, such as GoCompare
and Moneysupermarket3, have reported early signs of recovery. Moreover, with
around 23% of people4 expressing concerns over their household finances,
we expect consumers to shop around more when purchasing insurance.
FTSE350 life and non-life insurance index
02 Feb 2020 to 07 Jul 2020
FTSE350 life and non-life insurance index
2 Feb 2020 to 7 July 2020 (Source: London Stock Exchange)
10,000
(-23%)
(-47%)
8,000
6,000
4,000
(-20%)
(-26%)
2,000
0
Feb
2020
Mar
2020
Life
Apr
2020
May
2020
Non-life
3 Company RNS announcement, 11 June.
4 ONS Survey April 2020.
10 Strategy&
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
Jun
2020
Jul
2020
We note that some of the established
vendors have experienced stagnating
growth. This trend is expected to
continue given the growing preference
among insurers and brokers to use a bestof-breed approach.”
Disruptive digital insurance encompasses a wide range of products from Internet
of Things (IoT) insurance to on-demand insurance. While some have received
considerable public attention, including the US-based Lemonade which has
recently completed an IPO, the majority remain nascent. Those operating in the
motor and on-demand insurance space are expected to be the most hard hit by
the pandemic.
Core insurer and broker platforms are mature products which have remained
resilient, though ongoing re-platforming and implementations are being delayed.
We note that some of the established vendors have experienced stagnating
growth. This trend is expected to continue given the growing preference among
insurers and brokers to use a best-of-breed approach.
23%
of people have
expressed
concerns over
household finances4
Data and digital have been the focus for insurance providers in recent years
as success in customer acquisition and retention, and profitability, increasingly
rely on providers’ data and digital capabilities. Significant headroom remains for
FinTechs and incumbents to offer differentiated solutions.
What does it mean for FinTech investors?
Established FinTechs providing data and digital solutions remain attractive
targets, particularly as bolt-on opportunities to existing insurance
software assets.
We also see potential consolidation opportunities in the core insurer and broker
platform market.
Subscale FinTechs providing alternative or disruptive products are more
challenged and it remains unclear how they will emerge from the pandemic.
Some will not survive and others, like Brolly, which was acquired by Direct Line
Group, will be attractive targets for incumbents.
4 ONS Survey April 2020.
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors? 11
Card payments are expected to
rebound as retail activities pick up
and as consumers continue to move
away from cash.”
2.1%
Payments
Payments has been one of the most heavily impacted sectors as COVID-19 has
hit retail spending, trade and travel. However, the pandemic has accelerated the
shift in consumer behaviour towards ecommerce5, away from cash and towards
alternative payment methods6. Accompanying these changes is the need for
greater consumer protection and security.
fall in online
card spending5
Despite short-term shocks, payments remain systemically important and will
continue to lead innovation.
What does it mean for FinTechs?
Point-of-sale payments have suffered heavily. Card payments are expected to
rebound as retail activities pick up and as consumers continue to move away
from cash. At the same time, the adoption of contactless and mobile wallets is
set to grow.
Ecommerce payments have been less impacted. Online card spending fell just
2.1% year-on-year in April, while total card spending was down 21%7. Consumers
are also increasingly turning online in categories such as education, healthcare
and leisure. While it is uncertain the extent to which such behaviour will persist, the
prevailing trend towards digitisation will undoubtedly be beneficial to FinTechs.
YOY change
monthly
value
of cash
withdrawal
YoY
changeinin
monthly
value
of cash
withdrawals
%, Jun2019
2019 to
to Jun
2020
June
June
2020 (Source: LINK)
0
-10
%
-20
-30
-40
-50
-60
Jun
2019
Jul
2019
Aug
2019
Sep
2019
Oct
2019
Nov
2019
Dec
2019
Jan
2020
Feb
2020
Mar
2020
Apr
2020
5 ONS, internet sales as a percentage of total retail sales shows the internet accounted for 32% of
retail sales in May (up from 22% two months earlier).
6 Mastercard global consumer survey found 79% of respondents now use contactless payments.
7 UK Finance data released 15 July 2020
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
May
2020
Jun
2020
Jul
2020
Aug
2020
Internet sales as a percentage of total retail sales
Internet
salesto
asMay
a percentage
of total retail
sales
May 2019
2020 (Source:
ONS)
%, May 2019 to May 2020
40
%
30
20
10
0
May
2019
Jun
2019
Jul
2019
Aug
2019
Sep
2019
Oct
2019
Nov
2019
Dec
2019
Jan
2020
Feb
2020
Mar
2020
Apr
2020
May
2020
Jun
2020
Jul
2020
Non-card payments encompass a wide range of services and technologies
which power bank transfers, Open Banking payments and other alternative
payments. Payment Services Directive 2 (PSD2) has facilitated innovation and
built the foundation for growth in the sector. As such, key market participants
in the card markets have started building a presence in the non-card payment
space, as seen with Mastercard’s acquisition of Vocalink and API provider
Finicity, and Visa’s acquisition of Earthport and Plaid. Moreover, the Bank of
England initiative to renew the Real Time Gross Settlement system (RTGS)
is expected to provide the crucial infrastructure needed to further boost
innovation and competition in this market.
International payments in the retail segment, such as remittance and
travel money, are more impacted by COVID-19 than in the B2B segment.
Remittances are forecast to decline by around 20% in 20208 and the retail
segment may remain volatile in the medium term as spending power contracts.
While the B2B segment may rebound as the global supply chain recovers,
the outlook remains uncertain given the potential impact of a recession.
Payment security is expected to become increasingly important as we shift
from offline to online, and from cash to card and alternative payments. This shift
will create strong opportunities for the rich ecosystem of FinTechs, ranging from
PCI compliance and tokenisation to payment authentication and AI-powered
fraud detection.
8 World Bank April 2020 forecast
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors? 13
%
Payment methods used by consumers
Payment methods used by consumers
%
ofrespondents,
respondents,
April 2020 (Source: PwC Consumer Survey April 2020 (n=1,000))
% of
April 2020
63
59
61
43
53
35
25
17
In-store
using cash
In-store
using card
Before the lockdown
In-store using
contactless card
33
14
In-store using
smartphone
Online
using card
Since the lockdown
What does it mean for FinTech investors?
Despite the near-term shocks and slowdown in deals, payments remain a
mature and attractive sector for FinTech investments. There have already
been signs of an uptick in activities, such as Square’s acquisition of Verse,
Mastercard’s acquisition of Finicity, and SoFi’s acquisition of Galileo.
Valuations of payments FinTechs have been among the highest in the market
and a short-term correction in valuation will be highly favourable for potential
buyers. The payments landscape has become crowded in recent years and the
pandemic will shed light on the resilience and robustness of new services and
business models.
FinTechs operating in the ecommerce and payment securities space
remain attractive and will likely continue to benefit from a strong tailwind
post-COVID-19.
The non-card payments market has received less attention from financial
sponsors due to its breadth and complexity. As card payments deals become
increasingly competitive, this area will present significant opportunities,
both B2B and direct-to-consumer (D2C), for financial sponsors.
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26
24
Online using
digital wallet
14
11
Online using
PoS finance
Valuations of payments FinTechs have been
among the highest in the market and a
short-term correction in valuation will be
highly favourable for potential buyers.”
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors? 15
Asset & Wealth Management (AWM)
The AWM market has been on a rollercoaster ride since February. Despite
increased volatility, personalised service and the value of traditional active
management have been fairly resilient.
While we expect asset and wealth managers to focus on reallocation and
capital reserve preservation in the near term, the COVID-19 pandemic could act
as the catalyst to drive positive long-term changes towards greater flexibility,
transparency and personalisation.
Netsales
sales
of funds
in UK
and Europe
Net
of funds
in UK and
Europe
£bn,
2019to
to May
May 2020
AprilApril
2019
2020 (Source: The Investment
Association, EFAMA)
10
100
5
0
0
UK
Billions (£)
Europe
Billions (£)
200
-100
-5
-200
-10
-300
-15
-400
-20
Apr
2019
May
2019
UK
Jun
2019
Jul
2019
Aug
2019
Sep
2019
Oct
2019
Nov
2019
Dec
2019
Jan
2020
Feb
2020
Mar
2020
Europe
What does it mean for FinTechs?
Fund platforms have remained resilient despite the initial wave of asset
outflow. More recently, D2C and share dealing platforms have benefited
significantly from the influx of retail investors and increased dealing activities.
Leading platforms, such as Hargreaves Lansdown, Interactive Investor,
Transact and Vanguard have reported continued growth in client numbers
and assets-under-administration (AuA).
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Apr
2020
May
2020
Jun
2020
Jul
2020
Net sales of retail funds in the UK by channel
Investment Association)
NetMay
sales2019
of retail
the UK(Source:
by channel
tofunds
Mayin2020
The
£bn, May 2019 to May 2020
10
Billions (£)
5
0
-5
-10
-15
May
2019
Jun
2019
Fund platform
Jul
2019
Aug
2019
Sep
2019
Oct
2019
Nov
2019
Dec
2019
Jan
2020
Feb
2020
Mar
2020
Apr
2020
May
2020
Jun
2020
Jul
2020
Other channels (off-platform)
Wealth and platform technology vendors have been negatively impacted
from both the operational and revenue perspective as income is often tied to
assets-under-management (AuM). Existing re-platforming and implementations
are facing further delays but existing providers should prove resilient given the
scale they have built through a recent wave of consolidation, such as FNZ’s
acquisition of JHC and IPSI, Bravura’s acquisition of FinoComp and Midwinter
and Avaloq’s acquisition of Derivative Partners. Post-COVID-19, platform
technology vendors may benefit from the greater digitisation in the AWM
market creating opportunities for upselling and new products.
Robo-advisors remain nascent with AuM estimated at between $300bn –
$400bn globally8. In this time of extreme market volatility, both the performance
and service of robo-advisors are being tested and scrutinised. The ability to
offer more human-interaction and advice through a hybrid model, such as
Betterment and Personal Capital, will continue to be a clear advantage.
$300bn
-$400bn
Robo-advisors
remain nascent with
AuM estimated at
between $300bn –
$400bn globally9
What does it mean for FinTech investors?
Fund platforms (including D2C and advisor platforms) remain highly attractive
targets which have not only been resilient through the pandemic but will
continue to benefit from a range of positive long-term market drivers.
The wealth and platform technology market remains concentrated with a few
large vendors and pre-COVID-19 valuations that were too frothy for financial
sponsors. While they remain attractive targets, opportunities may be limited
and available assets hotly contested.
9 Aite and Backend Benchmarking
Strategy&
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors? 17
Capital Markets
Exceptional market volatility has boosted trading across asset classes,
leading to an uptick in trading activities and benefiting market participants
across the capital markets value chain. However, ongoing uncertainty and
remote working arrangements call for greater prudence and vigilance in
assessing and mitigating potential operational, financial and regulatory risks.
YoY growth of equity trading volume
YoY growth
of June
equity2020
trading
volume LSE, NASDAQ)
May
2019 to
(Source:
May 2019 to June 2020
150
%
100
50
0
-50
May
2019
Jun
2019
Jul
2019
Aug
2019
LSE secondary market
Sep
2019
Oct
2019
Nov
2019
Dec
2019
Jan
2020
Feb
2020
Mar
2020
US equities
What does it mean for FinTechs?
Online retail/semi-institutional brokers have been gaining significant
popularity, particularly among millennials. A growing number of low-cost or
zero-commission online brokers such as Robinhood10, Degiro and eToro11
have flourished. Use of online brokerages has exploded since February as
retail investors flooded the market. While growth is expected to normalise over
the medium term, it will continue to be supported by innovation and millennial
savers. The recent surge of retail activity has highlighted the role of online
brokers in investor education, which could differentiate platforms.
10 R
obinhood reported 3 million new accounts created in the first quarter of 2020 and completed
Series F fundraising in May which valued it at $8.3bn.
11 eToro reported 427% growth in the first four months of 2020.
18 Strategy&
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
Apr
2020
May
2020
Jun
2020
Jul
2020
Aug
2020
%
New
growth
selected online brokers
Online user
brokers
new userof
growth
YoY growth,
Q1 2020
YoY
growth,
Q1 2020 (Source: Company accounts)
289
169
149
58
Plus500
Etrade
TD Ameritrade
Capital markets infrastructure, such as pre-trade, at-trade and post-trade
software and services, have withstood the operational challenges and benefited
from elevated trading activities. While recent focus has been placed on
innovation, the pandemic highlighted that resilience and robustness cannot
be taken for granted, particularly given the increasingly complex IT ecosystem
of buy and sell side firms. Heated competition among capital markets firms,
combined with advances in data analytics, will continue to create opportunities
for vendors.
Middle and back office software designed for operational simplification has
been an area of growth as cost saving becomes increasingly important while
margins are being squeezed. The pandemic has also accentuated the importance
of automation and digitisation to operational resilience. Therefore, while the focus
for buy and sell side firms in the near term will be on stability and continuity,
demand for middle and back office software is expected to remain strong.
What does it mean for FinTech investors?
Most online broker platforms are largely undifferentiated, therefore it’s tricky
to determine which platforms will win. However, their importance as a tool to
digitally access the market will grow.
Charles Schwab
Heated competition
among capital
markets firms,
combined with
advances in data
analytics, will
continue to create
opportunities
for vendors.”
There will continue to be significant consolidation and buy and build
opportunities across geographies and asset classes, especially in the
fragmented trading platform and infrastructure market.
There will be several market infrastructure opportunities over the next 6 to
12 months which may allow for a buy and build approach to develop a new
end-to-end infrastructure provider.
In terms of operational simplification and cost reduction, there is still
a considerable way to go for the majority of capital markets providers.
Software vendors who can assist in reducing cost and complexity will
flourish and remain an attractive investment opportunity.
Strategy&
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors? 19
RegTech and support services
The RegTech and support services space consists of a wide range of technologydriven solutions, from governance and risk & compliance (GRC) to financial crime,
risk management and document & data management. FinTechs in this space
are booming as efficiency and cost-saving become critical across the financial
services sector, particularly at a time of growing regulatory oversight.
What does it mean for FinTechs?
13%
forecast growth
per annum of
GRC12
GRC is a $31bn market globally and forecast to grow by around 13% per
annum until 202412. Areas which enterprise GRC solutions cover, such as
business continuity, threat management, vendor management, and incident
management, have become focal points during the pandemic. Moreover,
the robustness of these solutions increasingly depends on real-time data,
monitoring and reporting capabilities which are the key drivers of future growth.
Financial crime solutions encompass areas such as ‘know your customer’
(KYC), anti-money laundering (AML), sanctions, anti-bribery and fraud
detection. Penalties paid by financial services companies since the financial
crisis have ballooned to around $408bn, driving demand for financial crime
solutions. Advances in data analytics, artificial intelligence and biometrics have
encouraged FinTechs to spring up across various specialist areas. In contrast
to other RegTech and support services, financial crime solutions, such as KYC
and AML, can significantly impact customer experience. COVID-19 has created
stronger demand for multi-channel and mobile-compatible solutions to support
the digital customer journey.
%
Percentage of firms surveyed that experienced financial crime within
Percentage of firms surveyed that experienced financial crime within the last 24 months
the last 24 months (Source: PwC Global Economic Crime and Fraud Survey)
30
2009
34
37
36
2011
2014
2016
12 IDC research, including software integration, technical support and consulting services.
20 Strategy&
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
49
47
2018
2020
Penalties paid by banks since the financial crisis
(Source: Thomson Reuters)
Penalties paid by banks since the financial crisis
Billions (£)
42
78
22
36
408
2019
Total
27
25
73
52
22
8
2009
2010
23
2011
2012
2013
2014
2015
2016
2017
2018
Regulatory and compliance reporting software has thrived as the level of
regulation and the breadth and depth of reporting requirements have grown.
Technology, such as workflow management systems, risk engines and automated
reporting, is critical to ensure compliance with the evolving regulatory and
reporting requirements in a cost-effective manner. With significant value to be
unlocked from simplifying manual compliance and reporting functions, we expect
demand to remain strong for a wide range of solutions.
Data management and analytics are among the key value creation drivers for
financial services companies. The challenge of multi-channel service delivery
also highlights the urgent need for incumbent financial services companies
to have clear visibility of online and offline data, creating a ‘single source of
truth’ from which business insights are drawn. Hence, FinTechs providing data
management and analytics will continue to flourish.
What does it mean for FinTech investors?
RegTechs remain highly attractive targets, but a large population of earlystage RegTechs offering similar services makes it challenging to identify
potential winners.
Data management, especially enterprise data management among tier one and
two financial services companies, is a relatively mature segment served by a
few established data vendors. These will remain attractive to financial sponsors.
Data analytics is a fast-growing area. It is also a highly fragmented market
served by in-house teams, established enterprise data vendors and numerous
start-ups. As such, while favourable market drivers exist, investments in
data analytics FinTechs will continue to skew towards venture capital and
corporate buyers.
Strategy&
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors? 21
About our
Strategy& FinTech
Deals practice
Our market-leading FinTech Deals team brings expertise across the entire FinTech
market. With a diverse range of financial services and technology experts across
Europe, the US and Asia, we’re close to all the latest developments and market
trends, and as the FinTech sector grows, we further develop our capabilities.
We can use our knowledge of the FinTech market and deals expertise to
help you identify opportunities to create value across the entire deal lifecycle,
from strategy, origination and deal execution to post-deal integration.
Our deep sector knowledge, gained from working on hundreds of FinTech
deals, coupled with our unrivalled C-suite relationships, means we can be
your trusted FinTech deal partner and provide you with unique insights and
opportunities, whether you are an investor, corporate, entrepreneur or other
market participant looking to maximise value from the sector.
Visit our website to learn more about how Strategy& can help you
navigate the FinTech Deals landscape.
22 Strategy&
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Industry focus – FinTech deals in focus: What does COVID-19 mean for FinTech investors?
Who to contact
Andrew Macnab
UK FinTech Deals Lead
+44 (0) 7979 600615
andrew.macnab@pwc.com
Jeremy Sweetnam
UK FinTech Corporate Finance
+44 (0) 7999 394197
jeremy.sweetnam@pwc.com
Jialei Qian
UK FinTech Deals, Senior Manager
+44 (0) 7841 789002
jialei.qian@pwc.com
Strategy&
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Industry focus – Metering: a catalyst for transformation in the water sector 23
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