Financial services is among the industries where the transformative impact of technology is most apparent, and this has not gone unnoticed by private markets.
According to KPMG’s Pulse of Fintech H2 2019 report, there were 2,693 venture capital, private equity and M&A deals in the fintech sector in 2019, and private equity investment exceeded $3 billion.
With financial services accelerating ever closer to a digital ecosystem, we asked representatives from four private equity firms active in the fintech space to share their perspectives on the trends shaping the sector.
Which emerging technologies have the greatest transformative potential for the fintech sector?
Oliver Bevan: Fintech is fundamentally changing the way firms find and serve customers, manage operations and meet regulatory requirements. It is also opening up new revenue streams, both for existing financial services players and companies new to the sector. The key transformational technologies underpinning change will include open APIs [application programming interface], artificial intelligence, data science, robotic process automation, augmented reality and blockchain. These will impact across the breadth of the fintech sector whether it be in wealthtech, insurtech, paytech, capital markets tech or other sub-segments.
Meet the panel
Sam Ryder: We are believers that emerging fintech solutions that partner with the incumbent providers, rather than replace, are best positioned to succeed. Incumbents bring distribution and regulatory know-how, while emerging technologies can be nimbler and expand an incumbent’s product offering. Recent examples include banks partnering with fintechs to deliver a fully digital banking environment and financial advisors leveraging robo-advisors to bring efficiencies to their practice.
Christopher Cruz: Although we are experiencing significant innovation on the edge of payments (devices, applications, integrations) there is still much to improve about the core infrastructure of payment systems. Globally, we are still reliant on processing platforms that are based on legacy architectures. These include messaging systems with capacity limitations and a reliance on credit-like arrangements to make payments appear real-time. Improvements in payment infrastructure and interoperability could unlock significant transformations across the payments sector within fintech.
Blythe Masters: We have been talking about the application of big data, AI and distributed ledger technology to financial services for some time. In many areas we are reaching tipping points where these technologies will become pervasive. Combining real-time data flows and advanced analytics that leverage AI and machine learning has the potential to transform personal and institutional financial services. Both capabilities have so far been adopted largely as point solutions; by putting them at the heart of a financial organisation it is possible to open fundamentally new business models that are truly transformative.
From the perspective of enterprise, DLT and the resulting operational advances from straight-through processing and elimination of reconciliation offers great untapped potential that will depend on the large-scale platform fintech businesses offering sufficiently compelling network effects to offset the costs of adoption.
The crisis and shift to remote working have heightened cybersecurity concerns; what does this mean for fintech going forward?
SR: With the recent shift to remote work and the corresponding acceleration of financial services to a more digital environment, awareness and attention to cybersecurity will continue to accelerate. In payments, as an example, fraud is increasingly moving online given higher e-commerce transaction volumes. Security solutions that help merchants and processors prevent and manage fraud are well-positioned to capitalise on a growing market opportunity.
BM: Cybersecurity is of critical importance to all financial services firms, and the recent changes have only heightened focus on this space. A less explored area where we believe fintech has potential is on the insurance side of cybersecurity. Being able to more accurately predict, size and transfer the risk of systemic cybersecurity events is a structural need that fintech can help to address.
CC: Fintechs with distributed operations are nothing new but this trend has certainly become more pronounced as a result of covid-19 precautions in the workplace. The need for advanced cybersecurity solutions will not only exist as a result of this event but will be an ever-changing concern requiring continuous investment to ensure adequate protections for customers and employees.
OB: The rapid growth in digital propositions will make companies and customers more vulnerable to breaches of their IT systems. The rise of open banking will also mean that more customer data is shared and used by third parties, which again creates a challenge for IT security. This will in turn create an opportunity for those who can address the challenge.
Which sub-sectors offer the most interesting prospects in the near-to-medium term?
CC: The convergence of payments and software will continue to be a key theme, having achieved various stages of maturity depending on industry vertical. Integrating the increasingly complex web of commerce point solutions with payment processing capability will improve the customer transaction experience at a time when customer demands for frictionless transacting is highest.
OB: The combination of open banking and open APIs will change the entire retail financial services ecosystem, from the products and services offered, to who “owns” the customer and the distribution channels used. There will be a lot of innovation and disruption which will create new businesses and interesting opportunities for venture capital and private equity investors. Insurtech is also a really exciting area for investment. Technology is changing the way that customers are served, risk is priced and claims managed. The rise of the sharing economy and peer-to-peer insurance is also fascinating.
BM: Our focus is on infrastructure-like technology businesses that have the capacity to scale and offer the business services and insights needed to drive transformation within financial services. Within this space we see a lot to be excited about. The current climate is accelerating the shift to a more digital financial services industry, with greater personalisation for the individual and greater efficiency for enterprise. We are exploring exciting prospects that fit within this trend, running from next-generation core banking technologies, through to capital markets platforms offering straight-through processing and end-to-end transaction lifecycle management.
SR: LLR’s fintech team focuses on payments, including merchant processing, B2B payments and payment security, as well as wealth technology and bank technology. In each of these subsectors, we bring a long history of investing and believe that the underlying trends are strong – with the consistent theme being accelerating digitisation.
What do you expect the industry to look like by 2030? And what do you see as private equity’s role in shaping that?
CC: The fintech sector combines the best of technological innovation with the scale and profitability of global financial services. I believe that the sector will be as attractive an area of investor focus in 2030 as it is now. The role of private equity investors in supporting companies through transformational change, while achieving growth at scale, is a natural fit for a sector inherently known for disruptive convergence.
“The fintech sector combines the best of technological innovation with the scale and profitability of global financial services”
Christopher Cruz, Searchlight Capital Partners
SR: Private equity is fundamental to providing capital that helps emerging fintech players invest in their product, fund sales and marketing, and drive growth. According to data from PitchBook, 2019 set a record high with around $150 billion of investment into the fintech sector across private equity, venture capital and M&A. We expect investment into fintech to continue to be strong over the long term with a focus on technologies that make financial services more accessible, easy to use, transparent, and secure for businesses and consumers alike.
OB: By 2030 I expect the terms fintech and financial services to have merged. There will be no area of financial services that is not fundamentally technology enabled and technology driven. Private equity will have a role to play in this growth, both by investing in fintech ‘disruptors’ and by investing in the technology capabilities and new business models of incumbent players.
BM: The value of data monetisation and business facilitation derived from large-scale platform businesses has been more than proven over the prior decade. Indeed, the world’s most valuable companies are such Big Tech platforms. By 2030 we believe more fintech platforms will join that roster.
The consumer will look for a solution to their problem, not a particular product. The well-defined platform will deliver that solution, which will be far more important than the particular wrapper of insurance or wealth management. The traditional verticals across the industry will begin to blur, and scale and ability to access and process data will be increasingly essential. Individual data sovereignty and privacy protection will also likely be a feature of winning financial services platforms.