Financial Technology (Fintech) startups are making waves throughout the financial services industry. Traditionally functioning banks and credit unions are facing a time of extreme change, both competing with and potentially benefiting from these new financial technologies. KPMG recently released, “The Pulse of Fintech, Q2 2016: Global Analysis of Fintech Venture Funding” to accurately paint a picture of Fintech growth and funding.
The State of Fintech
According to the report, financial technology had been expanding globally over the last year. New businesses are forming with innovative methods for serving and delighting customers (especially millennials), and raking in profits.
“We are seeing a continued diversification across many dimensions of fintech – the growth of different subsectors, the size of organizations participating, the geographic location of fint
ech companies attracting investment and the increasing levels of activity from companies outside the traditional financial services industry”, stated Ian Pollari, Global KPMG International and Partner, KPMG Australia.
Q2 2016 experienced 195 deals, resulting in $2.5 Billion raised by VC-backed Fintech companies, or $9.4 Billion overall invested in financial technology.
The growth of Fintech has created an interesting and competitive scene to receive venture capitalist funding. In a very fast-paced industry, VC investors have become more hesitant to invest in visionary companies that do not yet have proven technologies or business models. In fact, the report states Q2 2016 saw a 12% drop in VC-backed deals compared to the prior quarter.
However, this is believed to have been a result of global market conditions. Median size of late-stage deals actually rose from $19.5M to $30M. Despite the Q2 drop in VC investing, funding is on pace to exceed investments levels of 2015.
Not only are Fintech companies starting up at high rates, but corporate participation is increasing. The report shows corporates participated in 30% of all North American Fintech deal activity of Q2 2016. In fact, this is likely a factor in the observation that, “Early-stage deal sizes in North America hit 5-quarter high” at $4.6M, a 53% increase over Q1 2016.
Furthermore, certain technologies, including Insurtech and Blockchain, experienced a number of significant funding rounds. According to the report, along with robo advisory and artificial intelligence, these technologies are expected to see more increased investment over the next few quarters.
Finally, Q2 faced an increase of Fintech globalization. Countries in different regions, such as the UK and Singapore, are working in collaboration to improve Fintech opportunities. Financial technology is not a national development or competition, but a global industry being pushed forward by both competition and collaboration.
What it means for the Future of Credit Unions
While there are conflicting signals, the general consensus shows a very positive outlook for Fintech. Credit Unions need to understand how the environment is changing. Credit Unions need to take advantage of available data and keep up with innovations, or profits will be swept out by Fintech startups. Only the innovative, evolved credit unions will have a place in the new financial services industry.