How investors and financial institutions can connect with FinTechs

Explore ways investors and established financial institutions can make the most of their FinTech investments and partnerships

In brief

• Strong investment returns are linked to investors having a good understanding of the FinTech landscape.
• Engagement with FinTechs represents an opportunity for financial institutions to drive innovative changes through collaboration.
• Making the right connections across the FinTech ecosystem will generate benefits for more stakeholders.

FinTechs have dramatically changed the financial services sector and the pace of innovation will only increase, thanks to changing customer needs, new business models and emerging technologies. Now FinTechs’ influence is expanding further, as firms in retail, technology and other sectors offer alternative ways to manage financing and payments. The rapid adoption of embedded financial products means that many companies in various industries will need FinTech capabilities, a necessity that will blur the lines between financial services and other sectors even further.

For established financial institutions, engagement with FinTechs represents an opportunity to drive innovation through collaboration. The economic lockdown in the wake of the pandemic put an even greater premium on digitisation and automation, two areas where many FinTechs excel.

Investors have gravitated to FinTechs, based on their track records and promising technology. Despite the pandemic disruptions and now the gathering economic headwind, FinTechs have continued to attract a great deal of capital. For investors, strong returns start with deep insight into the ever-evolving FinTech landscape. 

Impressive capital inflows from a range of investors

The flow of capital demonstrates the importance and wide-ranging impact of FinTech. According to research conducted by EY Parthenon in September 2022 from Pitchbook1, Crunchbase2 and the EY FinTech breakfast event on Thursday, 8 September3, in 2021, a record $139bn (£120.3bn) was invested in FinTechs globally (excluding M&A activity). In fact, that year was an outlier year in terms of funding, more than doubling the amount of investment from 2019 and 2020.  This has been reflected in the overall funding in the first half of 2022, which was $50.7bn (£43.89mn), down 46% year-on-year. The number of deals also fell to 1,225 in Q2 2022, down 17% quarter on quarter. Mega rounds – combined funds of $5bn or more - have mostly declined.

Investors remain active, however, though there will be significant levels of dry powder (the amount of committed, but unallocated capital a firm has on hand) thanks to the stacking of funds (the structure of all capital that is invested into a company). Lower valuations of organisations will allow investors to enter the market at lower variables. Greater consolidation of organisations can be expected, as long existing ‘established firms’ see opportunities to gain greater market share and capability by acquiring assets. But despite these concerns, the first half of H1 2022 saw investments exceeding those from all of 2020, reinforcing just how attractive FinTechs are to investors.

Whilst traditional venture capital (VC) remains the greatest source of FinTech funding, the investor landscape and approach to FinTech investments have evolved. Investment from corporate VC has increased by 500% from 2014 to 2022. Private equity participation remains relatively low at just 4% of today’s total investments. Angel investing has reached a new high of 15%, thanks to the growing numbers of FinTech founders who have become investors themselves and to the creation of specialty funds.  

Payment-related FinTechs – including those offering solutions for buy-now-pay-later, embedded banking and open banking – attract the most funding, though their share has decreased during the last year. Funding for digital lending FinTechs, InsurTechs, WealthTechs and capital markets FinTechs have all seen dramatic growth.

In the UK, FinTechs received $14.3bn (£12.37bn) in 2021 (up 250% from 2020) via 662 deals (up 12%). While the number of deals was down in H1 2022, overall funding reached $9.1bn (£7.87bn), a 24% increase over H1 2020. Two of 2022’s top five FinTech equity deals involved UK firms, Bloom and Sumup.

A number of factors make the UK FinTech market particularly attractive to investors, including private capital providers:

• The strong growth in UK FinTech revenue, which is up nearly 70% since 2015. 
• The level of innovation and variation across sub-sectors and niches and a mature ecosystem with regional hubs emerging outside London, including Bristol and Edinburgh.
• A number two ranking, behind only the US, on the Global FinTech Index.
• A consumer adoption rate of 71%, notably above the global average of 64%.
• A supportive regulatory environment, including the sandbox managed by the Financial Conduct Authority (FCA) and the Centre for Finance Innovation & Technology, a Kalifa Review recommendation.