We highlight 5 major fintech trends that have gained traction over the past few months.
The fintech industry is continuing to mature, with Q2’20 setting a new quarterly record for $100M+ mega-rounds and seeing a host of exit activity, including filings to go public from Lemonade, nCino, and Rocket Companies.
Despite a 17% QoQ surge in fintech funding in Q2’20, deals to the sector continued to plummet, and annualized deals and dollars fell to pre-2018 levels. This steady descent in deals began pre-pandemic, indicating the potential presence of other headwinds in addition to Covid-19.
Despite the overall contraction in fintech deals, there were some bright spots in areas like banking and payments. Below, we highlight 5 fintech trends, ranging from the growth of embedded fintech to consolidation in wealth management.
1. Embedded fintech gains traction across applications
Embedded fintech, which refers to the integration of financial products by non-financial companies into their offerings, is seeing growth across countries and applications.
Notable examples include:
- Shopify’s growing payments revenue illustrates the potential of embedded fintech in e-commerce. In the first quarter of the year, merchant solutions revenue accounted for 60% of total revenue for Shopify, driven primarily by payment processing fees. (We break down Shopify’s e-commerce strategy in this analysis.)
- In banking, Latin America-based fintech infrastructure startups are paving the way for the next generation of consumer banks, as regulators move to support open banking initiatives. In June, Brazil-based payments startup BeeTech picked up $21M in its Series A.
- HR platform Gusto offers Cashout, which grants employees paycheck advances — an area that has seen growing demand amid the pandemic.
- Automakers like Toyota and Ford are increasingly using data to improve embedded insurance offerings.
- Business services unicorn AvidXchange, which embeds bill pay software within small and medium-sized businesses’ tech stacks, raised $128M in April.
- Zillow is integrating fintech within real estate with home loans and closing services.
A number of companies enabling these sorts of embedded financial services raised during the quarter, including Airwallex (B2B payments), Checkout.com (B2C payments), and States Title (mortgage closing).
2. A new generation of bank service providers are emerging, but incumbents are watching
The growth of open banking has prompted continued investment into bank tech providers, such as Yapily and Setu. However, incumbents are beginning to provide open banking services as well. In June, FIS introduced a new instant payments service that allows users to pay directly from their bank accounts instead of going through a third party.
The widespread lockdowns and branch closures amid Covid-19 have brought additional attention to digital banking. Growing competition could accelerate consolidation in the space, as leading challenger banks look to gain market share and expand their product offerings. Some indicators of consolidation within the space are already emerging, with SoFi‘s $1.2B acquisition of Galileo and Mastercard’s $825M acquisition of Finicity in April and June, respectively.
3. Covid-19’s boost to e-commerce is a tailwind for fintech providers
The pandemic is forcing consumers and retailers to shift online, with e-commerce’s share of US retail sales jumping to an estimated 27% in April 2020 — up from 16% in 2019 — giving fintech providers a tailwind. Going forward, payments and checkout conversion solutions will be especially well-placed if online retail spending remains elevated.
4. Intense competition in retail wealth management led to consolidation in Q2’20
Trading activity is surging amid the pandemic as retail investors look to alleviate stay-at-home boredom. This trend is benefiting asset managers, which saw spikes in new brokerage accounts, and wealth tech startups, which picked up large rounds of funding. Wealth startup funding exceeded $1B in Q2’20 as deal activity rebounded from the prior quarter.
As competition begins to heat up in the retail wealth management industry, incumbents are snapping up wealth management upstarts to expand their products and services.
In May, Franklin Templeton acquired wealth management software platform AdvisorEngine; Charles Schwab bought portfolio management company Motif‘s tech and IP to boost its direct indexing services; and Goldman Sachs bought wealth management custodian Folio, which inherited clients from Motif when the latter was acquired.
In June, Empower, a retirement services provider in the US, purchased digital advisory firm Personal Capital in a deal worth as much as $1B.
5. Fintech saw a flurry of IPO filings in Q2’20
Multiple fintech companies filed for IPOs or went public in Q2’20, bucking the recent trend of mature startups remaining private as well as the drought of filings amid the early days of the pandemic. Companies that filed to go public include:
- Lemonade, a digital renter and homeowner insurance company
- nCino, which offers cloud software to banks
- Shift4Payments, an online POS provider
- Fusion Acquisition, a fintech-focused SPAC
Notably, 30-year-old insurtech company SelectQuote also opted to go public in the quarter.
For more sector trends and quarterly funding data, check out our State Of Fintech Q2’20 Report.If you aren’t already a client, sign up for a free trial to learn more about our platform.