Fintech firms worldwide have received the largest funding quarter on record, according to a recent report by CB Insights. The first quarter of 2021 saw start-ups raise $22.8bn from venture capital firms across 614 deals, beating the second quarter of 2018âs previous record ($22.4bn), when Ant Group, Chinaâs largest payments provider, raised a staggering $14bn in a single funding round.
While North America topped the table for both deal and funding volume (264 deals valued at $12.8bn), it was Europeâs fintech sector that saw the largest quarter-on-quarter spike, recording a funding growth of more than 180% across 151 deals valued at $5bn, surpassing Asiaâs 147 deals valued at $3.7bn. Deal activity grew in every region except for Africa, which recorded a 22% drop in deals during the first quarter of 2021.
Alex Kern, a senior intelligence analyst at CB Insights, notes that in contrast to a single enormous funding round skewing the figures, it was 57 mega-rounds of more than $100m across all fintech categories that drove the quarterâs growth.
The largest deals are so varied. It's not just challenger banks, it's trading apps, lending companies [and] payments companies
The number of mega-rounds in the first quarter of 2021 compares with 30 in the fourth quarter of 2020 and only 21 in the first quarter of 2020. They accounted for 69% of the total funding and contributed to an average deal size of $37m â almost double the $19.3m recorded in the fourth quarter of 2020.
âWhat stood out to me is that fintech has so many tentacles now. If you look at some of the largest deals, you wonât be able to say itâs this one sector thatâs driving the growth,â says Mr Kern.
âThe largest deals are so varied. Itâs not just challenger banks, itâs trading apps, lending companies, payments companies and also these large business-to-business rounds.â
Mr Kern cites MX Technologies, a US-based banking data analytics company and open banking platform, as an example of fintechs specifically angled towards helping banks go digital and improve their customer experience, âwhich to some extent is still new territory in fintechâ.
MX Technologies raised $300m, quadrupling its valuation to $1.9bn. While Mambu, a cloud-based core banking platform used by both fintech start-ups and traditional banks, became Germanyâs first fintech unicorn by securing $135m in late-stage funding.
âInvestors are recognising the changes that are happening because of Covid-19, and how important it is to be digital. Whatâs going to happen to the bank branch? Do we really need bank branches anymore? Can we offer people enough services through a mobile app? Thatâs a big cost reduction if you can do it,â says Mr Kern.
Digital challenger banks
Nubank, a Brazil-based challenger bank that offers savings accounts, credit cards and personal loans, raised $400m, boosting its valuation to more than $25bn. The company claims a user base of more than 34 million retail customers and has become the fourth-largest financial institution in Latin America in terms of market value, ranking among long-established traditional banks such as ItaĂșÂ Unibanco, Bradesco and Santander Brasil.
Meanwhile, UK-based challenger Starling Bank hit a milestone by securing a $376m funding round. The digital bank has been making inroads into business accounts and now boasts 5% of the UKâs small business banking market.
âItâs [the growth in fintech funding] clearly accelerating the changes that need to happen at [traditional] banks... there is real traction behind some of the later-stage digital banking businesses,â says Mr Kern. âIf youâre a bank, or really any company, the success of fintech is clearly a challenge for you.â
Mr Kern points out that incumbent banks are defending their market share by responding to digital challengers with services and products that leverage new technologies. He says partnering with fintechs through investment or open banking may also be key to improving the customer experience to better compete with fintech challengers.
âJPMorgan has launched its own digital consumer bank in the UK, and HSBC is offering a digital banking service aimed at [small and medium-sized enterprises] in the UK as well. But challenger banks are still moving ahead,â says Mr Kern, adding that incumbent banks increasingly need to invest in or partner with fintechs to remain competitive.