Blockchain technology continues to command a fair share of venture funding for fintech, one of the hottest venture capital (VC) targets worldwide. While the number of deals and the total value of fintech VC investment ebbed in Q3 2016, activity is expected to rebound in the fourth quarter and in 2017, according to a global analysis of venture fintech funding by KPMG and CB Insights.
The Q3 slowdown in VC fintech funding was due to the lack of $1 billion-plus mega-deals. The total dollars invested this quarter was also less than half of that in Q3 2015.
But despite the recent quarterly decreases, total fintech funding is on track to exceed 2015 totals.
Both the U.S. and the U.K. had weaker activity due to continued market uncertainty from the Brexit vote and the U.S. presidential election cycle.
Out of the three main global regions covered, only Asia saw an increase in VC fintech funding quarter-over-quarter, from $800 million in Q2 2016 to $1.2 billion in Q3 2016.
The blockchain fintech subsegment continues to show strength.
Bitcoin and blockchain investment activity peaked in the first quarter of 2016 with a total $153 million in 22 deals, then falling to $119 million and $87 million in the next two quarters. All but one of the first three 2016 quarters surpassed the $94 million in the 2015 third quarter.
The top Q3 2016 VC blockchain deals were Ripple with $55 million Series B, Coinbase with $10.5 million Series C-11, and Brave software with $4.5 million seed VC.
Payment technology VC investment activity fell sharply in 2016 from 2015 Q3’s $1.14 billion. In 2016, Q3 posted $475 million, the highest quarter for the year.
Ripple’s $55 million Series C investment was the fourth largest Q3 2016 payment technology investment and the only blockchain-related company to rank in the top four.
Among the top five payment technology deals in 2016, two were blockchain related: Ripple and Blockstream each received $55 million, making them the fourth and fifth largest fintech deals worldwide.
The future remains bright for payment solutions.
Digital wallets and point-of-sale solutions continue to draw interest from tech giants, with ApplePay and Google’s Android Pay disintermediating banks for market share. Key concerns are maintaining good customer experience, rapid transactions and payment assurance, in addition to reducing merchant costs.
B2B and cross-border payments have not seen significant fintech investment, but change is coming. Fintech companies can insert themselves into existing processes to reduce friction across the value chain.
Emerging trends include cloud-based open API platforms for accepting digital payments and payment systems with richer customer data to automate processes.
Regulatory initiatives impacting fintech vary among regions.
European and Australian regulators are pushing a regulatory standard, while those in the U.S. have been encouraging change without pushing a specific mandate.
In Europe, the revised Directive on Payment Services (PSD2) offers benefits for fintech companies and consumers alike and opens the payments area to new competitors who use aggregated data to create ancillary payment services.
The U.S. has seen a recent push to modernize the payment system that includes the development of a real-time system that leverages the ISO 20022 global message standard.
Blockchain technology has received the most VC investor attention in North America, where large financial institutions have invested in blockchain-related companies, announced partnerships to explore blockchain’s potential, or executed proof-of-concept activities.
Other large U.S. corporations are also taking an interest in blockchain technology, which is expected to grow over the next quarter.
The ability to move blockchain from proof-of-concept to adoption and production has been minimal, however. While the market continues to give blockchain companies opportunity to prove themselves, investors are becoming more concerned about results.
Over the next year, investors will assess the main fintech use cases and how long they will take to deploy.
Investor sentiment in fintech overall in North America remains positive. Enthusiasm for M&A, IPOs and liquidity may be lackluster in the fourth quarter, but 2017 should see momentum gaining.
M&A activity will be stronger as large financial institutions acquire startups and bigger startups merge with or acquire others.
Blockchain is also playing a role in Asia, the market with the most VC Q3 2016 fintech backing.
Blockchain and other fintech areas are gaining more attention from VC investors in Asia because of their potential to traverse different markets. One blockchain company, Juzhen Financials, a blockchain post-trade solution, was among the top 10 Asian fintech deals of Q3 2016 at $23 million.
“Blockchain is becoming very hot as banks and financial institutions examine best practices and look closely at what international companies are doing in the space,” said Raymond Cheong, a fintech and innovation partner at KPMG China. “VC investors are putting a lot of money into small blockchain technology companies in Asia. Some very new companies are already into their second or third round of funding.”
Ian Pollari, global fintech leader of KPMG International, noted a lot of fintech diversification is taking place in Asia.
Fintech areas other than blockchain include data, analytics and RegTech. RegTech is gaining attention in jurisdictions with more mature fintech ecosystems, such as Hong Kong, Singapore and Australia.
Fintech companies include the following verticals: lending, payments/billing, personal finance/wealth management, money transfer/remittance, blockchain/bitcoin, institutional/capital markets, equity crowdfunding and insurance.
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