Searching for Unicorns - Why payment and lending start-ups are so attractive to Investors

Written by: Currencycloud
Published on: February 09, 2016

FinTech investments

There are currently 150 start-up companies valued at $1 billion or more, 15% of which are in the FinTech sector. Known as “unicorns’, these lucrative businesses are in high demand – and investors are constantly on the lookout for the next one.

When it comes to FinTech unicorns, investors favour those in the payments sector. Stripe and Square top the table in terms of valuations ($6 billion in the case of Square), and have secured significant levels of funding from well-known venture capital firms. There is also a growing interest in the field of P2P lending – which is why traditional bricks-and-mortar banks are concerned about the emerging banking models.

So impressed are investors that they manage to attract almost $14 billion in funding. And there’s no sign of this slowing down any time soon. According to comments made in a recent webinar, Anan Sanwal, CEO of start-up investment specialists CB Insights, said that continuing FinTech investment is a direct challenge to established banks and their own operating frameworks.:

“In 2010, there were 223 unique investors within the FinTech space, and these are VCs only, not the angels, accelerators, or other types of investors that we track. In 2015, […] there are now 894 active investors. Investors see opportunities, they see blood in the space; it’s a massive industry.”

Taking a global perspective

In the Western “developed” world, FinTech startups are disrupting the finance industry by exploiting the gaps between the services offered by incumbent banks and the demands and expectations of their customers. Using technology, it is possible to shave costs and profit from those savings.

Because investors can “see” this model at work, they also recognise the value of such services. But the potential for FinTech goes much, much further – particularly in the developing world.

Little surprise then that investment in Asian non-banking FinTech start-ups went from $880 million in 2014 to $3.5 billion the following year.

In emerging markets like Nigeria, the economy is run almost entirely on cash – consumers do not typically have bank accounts for instance, and 95% of transactions are carried out in cash. Nigerians simply cannot afford the minimum opening balances stipulated by their local banks.

This presents FinTech start-ups with an enormous opportunity to establish themselves as the financial backbone of developing economies. Digital wallets are seen as a way to speed up local transactions and increase security for consumers. There are several efforts underway across the African continent looking at how to pay for goods and services using SMS messaging for instance.

Looking further forward, FinTech start-ups will work to integrate local digital wallets with global banking networks. In this way FinTech will play an important part in helping developing economies enter the global marketplace, and to ensure that local consumers are able to grow their finances more effectively.

And it is in this global networking opportunity that investors stand to make the largest returns on their stake. Particularly if their FinTech start-up of choice can quickly establish itself as the payment platform, or indeed P2P lending service, of choice in an emerging market.

Global networking opportunity

Alternative payment mechanisms

But FinTech offers opportunities beyond standard payments. Innovative ideas like Kiwi that allow low-income/low-credit consumers to pay for goods in installments via their smartphone. Kiwi not only helps to grow local economies, but also ensures that the poorest in society can obtain important services.

And for investors, the opportunity to realise a profit from even the poorest-performing economies is an attractive prospect. The potential ongoing returns are also likely to be far higher than for some other popular unicorns, many of which have been criticised for being overvalued in the first place.

As things stand, there is no suggestion that huge investment in start-ups will end anytime soon. But in the shadow of a major market re-adjustment (think DotCom Bubble 2.0), FinTech start-ups that are already turning profits will look like an even safer bet for investors.

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