Big Tech M&A War & CB Insights Global Fintech Report Q3

Get the essential points from the CB Insights report in 10 minutes or less and learn which companies could be M&A targets.

Our friends at CB Insights recently published a comprehensive report on the global VC backed fintech market. The full report can be downloaded from CB Insights website here where it was first published - for the investor in a rush we have extracted the relevant key findings from their summary and added our own extra analysis & predictions with an emphasis on ‘Big Tech’.

Q3’19 fintech funding topped $8.9B, a quarterly record when adjusting for Ant Financial’s$14B investment in Q2’18:As of Q3, fintech has raised $24.6B in 2019, already surpassing 2017’s annual total. Funding grew on the back of 19 $100M+ rounds worth approximately $4B in Q3’19.

Deals rebounded slightly in Q3’19 but are likely to fall short of 2018’s record as a result of a continued pullback in early-stage investing: Fintech deals in Q3’19 grew 6% from Q2'19, but they have dropped in every quarter in 2019 when compared to the same time frame last year. Early-stage (seed/angel and Series A) deals fell to an 11-quarter low and funding hit a 7-quarter low.

The US saw deals dip to an 11-quarter low while Asia saw deals spike and nearly surpass the US in Q3’19: The US saw deals dip as a result of a pullback in early-stage deals, which also contributed to the overall drop in 2019 global deals through Q3’19. Asia saw deals rebound as China reclaimed the lead from India as Asia’s top deal hub.

There are 58 VC-backed fintech unicorns worth a combined $213.5B: Q3’19 saw 6 new fintech unicorn births (Hippo, Judo, Deposit Solutions, QuintoAndar, Dave, and C2FO), and 3 more have occurred in Q4’19 as of 11/11/19 (Next Insurance, Ebanx, and Riskified). Other highly valued unicorns continued to raise late-stage capital, including NuBank, Gusto, and Stripe, among others, but none signaled an IPO was imminent.

Challenger banks have raised over $3B in 2019 YTD and Q3’19 saw $1.3B invested — a quarterly funding high: Q3’19 saw challenger banks funding bolstered by rounds to unicorns, including NuBank’s $400M Series F, which was the largest reported equity investment to a challenger bank and made NuBank the highest-valued challenger at $10B. Startup-focused challenger banks saw competition heat up with deals to Ramp Financial, Mercury, and Stripe, which launched card issuing.

The Big Tech Push

It’s no secret that ‘Big Tech’ companies are in an arms race to penetrate the financial services industry. This is very bad news for incumbents in the financial services - for example Amazon, Facebook and Google pose a great threat to the underlying business models of banks because:

  1. They have the mass internet scale e.g. around 70% of the global internet traffic flows through their servers.

  2. Massive network effects with customers e.g. the most popular consumer oriented internet services (Social media, Email, eCommerce) are delivered by these companies.

  3. Technology and machine learning capabilities - these companies employ some of the greatest engineers and scientists on the planet. In fact, top Universities in Europe and the US are losing researchers to big tech (see this article).

In a research report entitled ‘Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services by the World Economic Forum (WEF) - interestingly, the report cites cloud computing, customer-facing artificial intelligence and ‘big data’ customer analytics as three domains that are becoming ever more crucial to competitive differentiation among financial services firms. All these are areas in which Amazon, Google and Facebook have gained far deeper experience over the years compared to incumbent financial services players – as such the network scale effects will make it harder for the incumbents to catch up.

Just this week Wall Street Journal reported that Google and Citi have a strategic partnership for the search giant to offer checking accounts via Google Pay. Facebook is also currently flexing it’s muscles with regulators around the world over project Libra. So buckle up Big Tech is driving full to fintech!

The Fintech M&A War - Big Tech vs Incumbents vs Paypal

Finally, we’re receiving strong signals of fierce M&A activities featuring: Big Tech, incumbent financial services players and Paypal - where each faction will try to acquire notable market leaders/disruptors across various fintech domains. We are closely monitoring the following 8 companies that our signals indicate are likely to back an attractive acquisition offer. Our signals suggest that their management & majority investors would most likely prefer this route rather than pursuing further growth (with some uncertainty & risk) for an IPO! In future reports for our paid subscribers, we’ll make predictions on which of the Big Tech companies have higher probability of buying each of these notable startups.

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