Rise of fintech includes many future risks, FSB says

Venture capital (VC) funding of financial technology (fintech) companies in North America rebounded to US$1.8 billion in the first quarter (Q1) of 2016, up from US$1 billion in the fourth quarter (Q4) of 2015, according to a joint report produced by Amsterdam-based global advisory firm KPMG International and New York-based analytics company CB Insights released on Wednesday.

Global VC investment in fintech also rebounded to US$4.9 billion in Q1 from US$1.9 billion in Q4 2015. The region to produce the highest level of VC funding was Asia, which saw deals producing US2.6 billion, up from US$500 million in Q4 2015, mainly on the back of two deals each worth more than US$1 billion. Europe landed at at US$348 million.

North America’s funding bump was helped by a US$400-million investment in New York-based Oscar Health Insurance. This is indicative of the growing interest in developing fintech options for the insurance sector, an area that has been slow to grow, according to the Pulse of Fintech report.

“Insurance has long been considered a sector ripe for disruption, similar to banking, even though it has been traditionally much slower to innovate,” the report states. “Part of the challenge is that banking lends itself well to startup companies coming in and focusing on improving one component of the banking process. By contrast, it is difficult to split off a part of insurance and make a sustainable business.”

However, the large investment in Oscar Health Insurance and the growing number of insurance companies in the global fintech space is making this a key area to watch in the coming quarters, according to the report.

Robo-advisors are another aspect of fintech that is gaining momentum in North America as well as globally. The continuing development of robo-advisory services is making these companies attractive to investors, the study suggests.

“Robo-advisory companies globally are focusing on broadening the scope of robo-advisory beyond simple portfolio rebalancing,” the report states. “As this area matures and diversifies into more sophisticated portfolio construction and other offerings, investment is expected to grow significantly.”

Further growth is also expected in the level of collaboration between traditional financial services firms and robo-advisors, which will be beneficial to robo-advisors that find it difficult to be profitable.

“For many pure play robo-advisory companies, the cost of customer acquisition is critically high, while the return on customer relationships is quite low,” the report states. “This creates a challenge to make the economics associated with a standalone robo-advisory platform function efficiently.”

“Even market leaders have yet to fully prove the profitability of their business models and, as a result, there is likely to be a continued evolution of the go-to-market and distribution strategies for these solutions,” the report continues.

One area in which there seems to be less focus in North America is the payment space, which was, until recently, the mainstay of fintech investment in the region. There were fewer North American payment fintech startups in Q1, which was likely due in some part to market saturation, according to the study.

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