Founder and CEO of DealRoom, a project management solution and virtual data room for complex financial transactions.
CB Insights recently published their State of Fintech Q3 ’21 Report, highlighting trends in financial technology investments and deal activity. Covering payments, banking, digital lending, capital markets and wealth management, etc., this detailed report gives insight to investors interested in the sector’s financial growth opportunities.
Q2 produced the largest funding quarter ever recorded at $36.8 billion. Funding dropped 16% in Q3 but still recorded the second-highest quarter at $31.1 billion.
We saw the most deal growth across the digital lending, banking and SMB fintech sectors. This funding boom was driven by the increase of mega-rounds (deals worth $100 million+). In Q3, fintech companies raised 94 mega-rounds, which is even higher than the 88 reported in Q2, accounting for 64% of quarterly funding.
Global exits reached a high of 664 total exits, surpassing fairly stable numbers from 2018 to 2020. While Q2 saw a decrease in wealth tech, it set a quarterly record year-over-year at 132 deals. We saw a continued rise in choosing SPACs to go public versus traditional IPOs, such as with Alight Solutions and Offerpad.
Earlier in the year, South America led the pack in both deal count and funding, growing by 153% quarter over quarter. Since 2016, Latin America-based fintech funding has grown at 57% CAGR, with Brazil-based companies representing a staggering 70% of funding from 2016 to 2021. In Q2, we saw a surge in funding for Latin American payments companies, including EBANX, an integrated financial services company offering cross-border payment processing that is headquartered in Brazil. The company raised $460 million through investors such as FTV Capital, Advent International and Endeavor. Mexico-based Clip, which offers a mobile plug-in to accept payments and a risk management system, received $397 million in funding from Softbank Group and Viking Global Investors.
On the international front in Q3, the U.S. led in funding at $14.6 billion, totaling the value of all other regions combined. The U.S. also led in mega-round deals at $9.3 billion, while Asia’s mega-round funding had its third consecutive quarter of growth, surpassing Europe. Quarterly funding decreased in the U.S., Europe, Latin America and Canada. Asia was the only region to succeed in passing Q2 numbers. Overall, all regions are reporting higher numbers YoY.
Another trend we saw in the second quarter of 2021 was increased interest and funding attraction towards early-stage virtual corporate cards and expense management companies. U.S.-based Tribal Credit, a corporate card designed to meet the needs of underserved startups, managed to raise $44 million during their Series A round in April of 2021. This trend reaches international waters, too—Payhawk, a company card organization that combines credit cards, payments and expenses in one platform and is headquartered in the United Kingdom, raised $20 million with their Series A funding. Additionally, fintech corporate card companies are investing resources into creating unique offers for their customers. Brex, for example, has begun to offer points redeemable in cryptocurrency.
During Q2 in the banking sub-sector, funding grew 43% quarter over quarter, and deals jumped 59%. As seen in Q3, banking funding exceeded 2020 totals by 76% YTD. Europe, at 32%, overtook the U.S. for the first quarter ever in banking funding. Early-stage deals lowered in percentages as late-stage deals grew by 7% YTD in Q3.
There has been a dramatic increase in the popularity of digital banks for younger clientele. Q3 saw lending funding as high as $14.9 billion YTD in Q3. Current, for example, is valued at $2.2 billion, raising $220 million in their Series D funding round. The New York-based digital bank focused on targeting teens and parents and now has over 3 million users on its platform. Interestingly, Palo Alto-based Step used influencer marketing in order to attract the teen demographic, receiving endorsements from popular social media star Charli D’Amelio, who also invested in the digital bank, and NBA player Steph Curry. Their branding even includes the slogan “banking for teens.”
How These Trends Might Fare In 2022
Perhaps companies have begun opting for SPACs over traditional IPOs due to their faster execution time and the possibility of raising additional capital. We can expect to see more organizations opting for SPACs as we continue into 2022.
Online banking options also continue to grow, notably in Latin America. Nubank debuted on the New York Stock Exchange last December with a $52 billion market cap. Having recently expanded its services to Mexico, its 48 million users makes it one of the largest digital banks in the world. With plans to expand into more South American countries, interest in digital banking is likely to continue to increase into 2022.
Due to the popularity of cryptocurrency, startups have leveraged machine learning as a mechanism to help federal investigators combat crypto crime. Chain analysis, for instance, is a blockchain analysis company helping banks and governments prevent and investigate cryptocurrency crimes and money laundering. I expect more startups to pop up that provide similar services.
Visa announced last March its ability for users to pay using cryptocurrency. Clearly a popular decision among their customers, Q1 of 2022 involved $2.5 billion of payments made with crypto wallet-linked cards. As they’ve already partnered with 65 cryptocurrency platforms and exchanges, we can expect other companies to follow suit during this year as customers demand more flexibility from financial institutions.
We can assume trends such as compliance, risk management solutions and digital banking will continue to explode over the next few quarters as the world is still recovering from the economic chaos over the last 18 months. It is important investors continue to monitor these trends in the fintech sector, as market disruptors and innovation can lead to incredible investment opportunities.