When last did you transact at a bank? How do you pay your bills? Who manages your stock portfolio? How often do you even use your credit card or visit an ATM (spoiler alert: these are both fintech)? 

Fintech is broadly defined as the application of technology to improve the use and delivery of financial products and services. It may seem like a contemporary buzzword, but it’s been buzzing around since at least 1967, when it appeared in a Boston Globe article about an investment business providing expertise and funding to startups in the nascent financial technology industry. In the early 1990s, Citicorp's John Reed launched the term into the popular lexicon, using it to refer to the Financial Services Technology Consortium, a project aimed at promoting financial sector cooperation from a technological perspective. 

However, the roots of fintech technology lie 3,200m beneath the ocean, in the first transatlantic cables laid in the 1860s, which enabled financial data to be transmitted between the world’s major markets instantaneously. Fast forward to 1918, and the Fedwire Funds Service allowed secure transfers between banks by telegraph – the antiquated antecedent to today’s digital payments. The launch of the first universal credit card by Diners Club International in the 1950s changed how consumers spent money and acquired credit, while Barclays’ introduction of the first ATM in 1967 made accessing cash and basic banking services as convenient as buying soda from a vending machine. The 1980s saw the introduction of the first online banking service, while the first internet banking website appeared in the 1990s, when the dot-com boom also gave rise to online payments and stock trading. 

Fintech as we know it today grew exponentially in the wake of the 2008 financial crisis, when widespread disillusionment with traditional financial institutions created a booming cycle of transformation and adoption. Innovations including digital currency, mobile banking, easier online payment integration, neobanks, digital wallets, and peer-to-peer payment apps followed, each offering consumers and businesses new ways to manage their finances while forcing traditional institutions to adapt or die. 

Fintech market dynamics

Given its indispensable role in managing global finance, the fintech sector has grown enormously. However, funding recently dipped to a 12-month low, with Q3 2024 attracting $3.3 billion – a YoY decrease of 69 and a 50% decline QoQ. This comes on the back of fewer mega deals (only nine, compared with 17 in Q3 2023) and investor caution as a result of anticipated rate cuts and the political uncertainty engendered by the US election. 

Perhaps ironically for a sector aimed at disrupting long-established financial structures, fintech is being slowed by increasingly stringent regulations around disclosures and record-keeping. In the US, for example, the Consumer Financial Protection Bureau’s proposed rule on paycheck advances and the Federal Deposit Insurance Corporation’s new rule on third-party deposits aim to enhance transparency and security in non-bank financial intermediaries, promoting stricter oversight and protecting consumer funds, which fosters a safer and more transparent financial ecosystem. This will improve trust in fintech in the long run, but may hamper short-term growth.

Data security presents another challenge. As of October 2024, 10,626 data breaches had been confirmed worldwide, almost double the 2023 figure of 5,199, with the average cost of such a breach rising 10%, to $4.88 million. Fintech startups are thus under enormous pressure to invest in data protection to avoid loss of money and reputation. 

That reputation is crucial in an increasingly crowded market, where consumers have more choice than ever and companies are grappling to differentiate themselves. The pervasive nature of social media means that missteps are likely to be disseminated widely, making reputation management essential. 

Proliferating challengers means more competition not just for customers, but also for funding. VC funds are casting an increasingly critical eye on startups’ product offerings, market opportunities, and risks. Moreover, the burgeoning trend of market concentration could see fintech startups locked in a vicious cycle, becoming more vulnerable to mergers, acquisitions or closures, reducing industry diversity. This could benefit traditional banks but limit funding to well-funded players, stifling innovation and hindering smaller fintechs. 

Despite these challenges, the sector holds enormous growth potential. The 50 basis point reduction in interest rates implemented in September 2024 by the Federal Open Market Committee is expected to improve appetite for fintech funding, which may well shift towards equity rather than debt funding. Meanwhile, VC funds hungry for high returns are likely to favor early-stage startups and those with a proven track record of profitability. 

‍Emerging fintech trends

There’s no doubt that AI and GenAI will shape the evolution of the industry more and more. In Q3 2024, the Business Expense Management, Capital Markets Tech, Financial Wellness Tools, and InsurTech Infrastructure sectors drove adoption, including an AI-powered accounts payable solution and document intelligence software that grants risk insights on legal and medical records, for example. 

Product updates in Q3 2024 are revealing too, illustrating a flurry of activity in Banking and Infrastructure, Wealth Tech and Sustainable Finance, InsurTech, Blockchain, and Payments. 

Banking and Infrastructure innovations included Revolut, N26, Bunq, and Monzo expanding their services, with Revolut launching in Italy and Singapore and planning Revolut Invest. New white-label “buy now, pay later” solutions from Equipifi, Jifiti, and Klarna are expanding the range of customer choices, while 10x Banking introduced "meta core" for cloud-native transformation.

On the Blockchain front, Solend rebranded to "Save" and launched SUSD, saveSOL, and dumpy.fun. Bitget introduced a fiat OTC platform for block trades. Ctrl released a new self-custodial wallet supporting 1 800+ networks, Google and social media authentication, and a smooth token conversion for existing holders. 

The Payments space saw business expense management startups like TranscendAP, Stampli, Airbase, and Coupa introduce advanced AI features for accounts payable automation. Brex launched an API-driven embedded payments solution, while Cash App exited the UK market to focus on US growth. 

In Wealth Tech and Sustainable Finance Pocketnest, EarnUp, and BrightPlan launched AI-powered financial companions, guidance tools, and wellness coaches. DailyPay added cash-back, savings, and Credit Health to its platform, along with a new human capital management solution. Robinhood launched joint investment accounts, and SigFig expanded its advisor platform with new AI features. 

InsurTech developments included Qover launching motor insurance in Ireland and Trupanion expanding pet insurance to Germany and Switzerland. InsurTech startups introduced AI-powered solutions: Five Sigma's Clive, CLARA Analytics' Claims Document Intelligence Pro, Applied Systems' Epic Dashboards, and Kyber's automated claim notification platform. 

Overviews like this and our blog post on fintech industry trends are useful for developing a general understanding, but informed decision-making relies on a deeper understanding of the different types of fintech. Below we have a look at the different segments of the fintech space. ‍

Fintech segments

With so many developments being disruptive in nature, fintech can tend to blur the traditional boundaries between fields. Nevertheless, it can be classified into segments for ease of understanding. 

Below, we explore some key sectors in greater detail:

Fintech Infrastructure comprises the underlying software, hardware, protocols, and networks required to conduct financial transactions online. It can be classified into five primary segments: Banking services, Payment and subscription management, Fraud prevention, Lending-as-a-service, and Investment and financial management services. Owing to the challenges of developing in-house infrastructure, including compliance issues, there is a growing cohort of fintech technology infrastructure-as-a-service (IaaS) providers creating dedicated platforms that can be used by a variety of enterprises. This can be provided either full-stack, which requires fewer sources, or white labels, which is highly customizable. Risks to the sector include long development periods and sales cycles, increasing vulnerability to cyberattacks due to being cloud native, and potential compliance breaches due to tightening privacy laws. 

Decentralized Finance uses blockchain technology to offer peer-to-peer financial services, bypassing traditional banks. The Binance Smart Chain hosts the most DeFi apps; however, projects accounting for more than half the DeFi ecosystem’s $102.7 billion reside on the Ethereum blockchain, which faces problems including high fees and slow processing. Ethereum’s switch from proof-of-work to proof-of-stake has opened it up to being scaled significantly in the future, potentially increasing daily transactions to 8.6 billion. DeFi demand is driven by high yields, underbanked populations, and SME credit needs. Risks include the regulatory balancing act of protecting consumers while maintaining decentralization and innovation, scalability and security challenges, high levels of interdependence within the ecosystem, and the inherent risk of such a high-yield investment vehicle.

Insurtech is disrupting personal and commercial insurance with an enhanced focus on personalization, utilizing emerging technologies such as AI, Internet of Things devices, and data analytics to gather real-time data and automate insurance functions, offering more accurate pricing and faster claims processing. Insurtech providers have targeted underserved segments such as SMEs and gig workers. The explosive growth of cyberattacks has also fueled the development of specialty cyber insurance products. 

Neobanks are digital-only banks operating through websites and mobile apps, offering services similar to traditional banks and operating either with or without a banking license. High smartphone penetration has enabled their growth, along with developments in banking-as-a-service and lending-as-a-service. Open banking has also been a key factor, enabling third-party providers to access customers' financial data via APIs, fostering new product development and personalized services by enhancing collaboration between banks and fintech companies. Lower fees, along with greater speed, convenience, flexibility, and personalization have helped neobanks attract youth and underserved consumer segments. Risks include difficulties building awareness and trust, sensitive information being targeted by hackers, stringent regulations, and heavy dependence on interchange fees making them particularly vulnerable during periods of economic uncertainty.‍

Investments and M&A

Fintech investment has slowed considerably recently, owing to fewer mega deals being finalized and investor caution over rate cuts and political risks, with neobanks, BPNL, and fintech infrastructure seeing the greatest declines. However, of the $3.3 billion raised across 75 rounds in Q3 2024, the majority (~75%) went to Banking and Infrastructure, although this still represented a 71% YoY decline, with 12% going to Blockchain and 9% going to Insurtech. All sectors saw a fall in deal size, notably Banking and Infrastructure, where the average deal size decreased from $207 million to $94.7 million, and in Payments, which dropped from $81.6 million to $18.2 million. 

Recent M&A activity in the fintech industry has aimed largely at enhancing, expanding, and diversifying existing offerings, as well as entering new geographies. Of the 15 fintech M&A deals during the quarter, the majority were in Banking and Infrastructure, followed by Wealth Tech and Sustainable Finance, and Insurtech. 

Payments saw the most valuable deal of Q3 2024, with Paylocity acquiring Airbase for ~$325 million, with the intention of expanding its payroll and human capital software solutions to include business expense management.

Banking and Infrastructure companies expanded and strengthen their services through M&As: Flywire acquired Invoiced, Stripe acquired Lemon Squeezy, Klarna acquired Laybuy in New Zealand, and Allica Bank acquired Tuscan Capital to enhance commercial finance offerings. 

In Blockchain, Jupiter acquired SolanaFM and Coinhall to improve its data and infrastructure capabilities and expand its cross-chain trading framework. 

In Wealth Tech and Sustainable Finance, Robinhood acquired Pluto Capital to enhance its AI-powered investment strategies, while Summer acquired Vault to expand its student loan benefits and assistance offerings. 

Insurtech infrastructure M&As focused on enhancing offerings, with Lumera acquiring ITM for international expansion and product strengthening, and Akur8 acquiring Arius to expand its property and casualty reserving software offerings and global reach.

‍Key fintech players

The fintech sector continues to see a host of startup activity, with new players looking to exploit market gaps and challenge incumbents. These are particularly interesting startups worth keeping an eye on:

Mondu targets the B2B BNPL payments space, offering fintech solutions for platforms and marketplaces, fraud prevention, and real-time credit checks. It has seen significant growth and secured $122 million for EU expansion and new payment solutions.

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PopID uses biometrics for secure payments, targeting payments, loyalty programs, and access control. It’s partnered with J.P. Morgan Payments to pilot in-store biometric payments in the US, while also expanding into the Bahamas and the Middle East, and has raised $15 million.

Karat Financial caters to content creators with tailored credit cards, evaluating creditworthiness based on social reach and engagement. It shifted from business credit to credit cards, attracting $101 million in funding.

Charlie focuses on digital banking for seniors, offering demand deposit accounts, debit cards, and social security cash advances. It tackles fraud with protection tools and has gained 20,000 customers and $31 million in funding.

For more information on these and other top fintech startups worth watching, see our blog.

Among the incumbents, the focus is more on expanding their investments, acquisitions, and partnerships in the space, with the most active being Mastercard, Visa, and Alphabet.

Visa, for example, has partnered with neobank Revolut to allow instant card transfers for the latter’s business customers, and in the cryptocurrency space with Web3 money app Wirex to boost digital currency use in the UK and the EEA, and with Tangem to launch a cryptocurrency payment card integrated with Tangem’s self-custodial hardware wallet. It has also expanded its relationship with DailyPay. 

Mastercard has partnered with Ampere to offer card-to-card in the UK and Europe, and with cryptocurrency startups Merucryo and Nuvei on a euro-denominated crypto debit card and an off-ramping solution for converting digital assets into fiat currency, respectively. 

Aside from funding startups like robo-advisory firm Frec, Alphabet’s subsidiary Google has partnered with Cash App to offer an alternative payment option on Android devices, and with Sionic to launch a comprehensive fraud detection and mitigation service. 

‍Stay informed about fintech innovation

This blog serves as a broad overview of what’s happening in the fintech sector, and yet it’s a lot to take in. Digging deeper to develop a nuanced understanding of the various trends, opportunities, and stakeholders can seem like an intimidating task. But with fintech reshaping the face of financial services more and more each day, organizations stand to get left behind if they don’t stay up to date with both the broader strokes and the relevant granular details. That’s what makes market intelligence solutions, such as those offered by Speeda Edge, so helpful. They gather vast troves of information, organizing it into digestible formats while also digging down to uncover hidden patterns and insights that can help organizations make the right investment, partnership, and acquisition decisions. ‍

Conclusion

If money makes the world go round, fintech is certainly setting it spinning. Following a recent speed wobble, the sector looks poised to recover, with a wealth of cross-pollinating fintech solutions being launched that will, in the spirit of innovation and competition, inspire greater creativity in financial management. For more information, check out our financial services topic on the blog. To learn more about how SPEEDA Edge can help your business leverage the fintech boom, contact us for a personalized demo.