The whirlwind of FinTech investment shows no signs of slowing. In fact, new data from venture capital (VC) analysis firm CB Insights, analyzed by global management consulting and professional services firm Accenture Financial Services, suggests FinTech startups' VC funding hit a new high last year, with major deals in the U.S., the U.K. and India leading the charge.
According to the analysis, which was released last week, an 18 percent increase in FinTech funding in 2017 led the industry to see $27.4 billion worth of investments. FinTech funding spiked 31 percent to $11.3 billion in the U.S. alone, and the U.K. market's funding deals nearly quadrupled in value to $3.4 billion.
The volume of deals increased, too, with nearly 2,700 investment rounds closing last year.
B2B FinTechs are playing an especially prominent role in this trend, analysts noted. Anecdotally, these firms have been talking for years about the industry's potential to make significant disruptions in areas like corporate finance, small and medium-sized business (SMB) lending and more.
“We saw more and more B2B FinTech models proving out at the banks, coupled with larger and later-stage investments as the FinTech world scales up,” explained Julian Skan, Accenture practice senior managing director, in a statement.
To dive a bit deeper into this trend, PYMNTS spoke with Skan about why B2B FinTech is gaining more attention from investors. Alternative finance, he said, is a significant driver.
“We believe the role for small- and medium-sized enterprises — FinTechs — in alternative lending is sustainable [because] it fills a gap that is left by the banks,” Skan explained. “One indication of this sustainability will be if FinTechs can prove their credit models using Big Data to be genuinely robust once they've gone through a full credit cycle.”
The alternative finance market saw a sudden boom, and a similarly sudden period of volatility as big industry names like Lending Club, OnDeck and Kabbage struggled to continue growth momentum. Kabbage was hit with a lawsuit last year initiated by an SMB borrower, and Lending Club's CEO resigned in 2016 following an investigation into improper loan sale practices.
And yet, investments continue to pour in — not just for these firms, but for the industry as a whole.
Earlier this week, FinTech C2FO secured one of the largest alternative lending funding rounds with $100 million provided by Allianz X, Mubadala Investment Company and existing backers. It's impressive, but shadowed by Kabbage's $900 million raised just last year, as Accenture highlighted.
“In most developed banking markets, many large banks have withdrawn from small and medium enterprise lending — and many other high-risk elements of lending — leaving a gap open for non-bank players to fill,” said Skan. “FinTechs may be able to lend funds less expensively, for example by using Big Data to augment or improve the creditworthiness assessment process. The assets of alternative lenders, like P2P [person-to-person], are increasing, and yet, in most cases, they aren't competing head-on with banks. However, it's difficult to tell if their methods are sustainable enough to grow into mainstream lending, and this won't be truly tested unless they complete a full credit cycle.”
A lack of direct bank competition isn't the only factor contributing to investors' support of the industry. Alternative lenders are increasingly collaborating with banks, either with financial institutions (FIs) integrating alternative finance platforms into their own portals (by providing the capital to be lent through alternative finance platforms), or by initiatives like those seen in the U.K., in which traditional banks are required to link SMBs denied for a loan to alternative players.
According to Skan, this B2B FinTech-bank collaboration is spreading beyond alternative finance.
“We are seeing more investment in B2B FinTechs as there is evidence around the productivity and savings they can provide to banks, particularly as it relates to the payments value chain,” he said. “B2B FinTechs are creating solutions that they can build once and then offer to thousands of banks around the world who need their solution. There is a path to profitability [that is] also seeing more progress in the number of B2B FinTechs working with banks.”
Accenture isn't the only company to highlight this trend, either.
Auditing service company KPMG's The Pulse of FinTech Q4 2017 report highlighted the rise in B2B FinTech focus headed into the new year.
“FinTech focused on the b2B market — including payments platforms, [SMB] lending platforms and SaaS [software-as-a-solution] solutions aimed at making back-office processes more efficient and effective — remain a priority for FinTech investors,” KMPG stated. “Globally, many financial institutions face significant financial pressures and challenges, particularly related to regulatory reporting and compliance. With regulatory requirements only expected to rise in most jurisdictions, RegTech solutions are becoming [a] key focus area for B2B investors and corporates.”
B2B finance and payments have a reputation for being slow to innovate and adopt technologies that have long been established in the business-to-consumer (B2C) world. An increase in investor appetite for B2B FinTech is both a response to and a driver of the industry's innovation, however. According to Skan, B2B FinTech can actually have advantages over B2C counterparts when it comes to securing funding.
“One large barrier for B2C FinTechs is the challenge of customer acquisition,” he said. “They are finding it difficult to get to scale — particularly FinTechs in the investment and retail banking space. Even in the examples of FinTechs who have been successful in gaining customers, there is little evidence that B2C can make sustainable profits in the future.”