In VC Competition With China, US B2B FinTech Wins

China is an emerging FinTech hotbed thanks to its expanding middle class, rapid digitization and electronic payments adoption. But a new report from Citi found that, while China may be the market to watch for FinTech investments, the U.S. continues to thrive at the top of the B2B FinTech mountain.

According to “Digital Disruption — Revisited: What FinTech VC Investments Tells Us About A Changing Industry,” Citi expects an influx in venture capital across the FinTech startup scape. But not all markets are created equal. China saw more than half of the world’s FinTech investments in the first nine months of 2016, the bank noted.

China Comes Out On Top…

“2016 was the year when the Chinese FinTech dragons roared, and some previously feted Western FinTech leaders wilted,” Citi declared in the report’s introduction. The nation’s current market climate is ideal to fostering FinTech growth and innovation, and investors will fuel that growth through 2017. That’s clearly great news for China, which has proven resilient despite a global slowdown in venture capital investments in FinTech startups.

China will shift its investing focus onto B2C FinTech companies, the report predicted, despite 89 percent of investments across China’s FinTech landscape landing at B2B firms in 2016. With just 11 percent going to B2C startups, China’s investing community is ready to tap into the B2C FinTech community that lacks funding from traditional banks.

The shift in investment activity is clear: Citi found that, as FinTech venture capital increased by 104 percent between 2015 and 2016, activity in Europe declined by 27 percent, and in the U.S. by 38 percent, during that same time. China also saw the largest FinTech investment rounds by volume thanks to the $1.2 billion investment in Lu.com and the $1 billion investment in JD Finance. Of the 27 FinTech unicorns born in 2016, eight were Chinese, the report noted.

But…

Still, more than half of those unicorns were U.S.-based. And with this ongoing shift in FinTech funding focus towards China in mind, Citi also predicted that other geographies will reign in the B2B FinTech funding sphere.

According to the report, 56 percent of U.S. investments in 2016 went to B2B startups, with investors expanding their views of the industry. That means funding will move away from alternative lending innovators — in 2015, 58 percent of investments went to this industry, seeing a drastic decline in 2016, during which just 20 percent of investments went to lending disruptors.

Meanwhile, 2016 saw an increase in the number of U.S. investments going to payments innovators, blockchain, insurance and wealth management (the latter two industries, in fact, saw no venture capital activity in 2015 whatsoever).

Both the U.S. and Europe, Citi found, are likely to dominate in B2B FinTech investments this year thanks to increased collaboration between innovators and traditional banks, which can provide funding to their FinTech partners while lending expertise necessary to service the corporate world. And while in the U.S. B2C FinTech startups secured 62 percent of total venture capital, in the first nine months of 2016, more than half of the 41 largest deals went to B2B startups.

The U.S. and Europe will dominate over China in the B2B FinTech space because China’s B2B FinTech market is smaller, Citi said. This year, Europe is likely to emerge as a strong contender in the B2B FinTech funding arena thanks to the rise in its own traditional banks now entering the space, filling in funding gaps left by a smaller venture capital market compared to the U.S. and Europe.

Geographic Overlaps

With all of this competition between FinTech investors across geographic markets, Citi noted that there is likely to be significant overlaps as companies expand internationally. Citi pinpointed China’s Alibaba as a particular example of this as the firm looks to generate more than half of its revenue outside of the country.

Further, the rise in M&A activity in the world of FinTech will lead to cross-border deals. Again, Citi pointed to Alibaba, which invested in India’s Snapdeal alongside Foxconn and SoftBank. This will give rise to new challenges in FinTech funding, the report concluded, including hurdles in international regulatory discrepancies, cultural and language differences and varying culture regarding finance and payments, for example, in the use of credit.