New businesses are popping up with a way to make finance
easier, faster, and more efficient every day.
With the rise of mobile technology and social media
integration into daily lives, companies have been able to offer new services to
eliminate some of the inconveniences people experience when it comes to
financial services.
Venture capital firms know this too, which means they're now
looking closely at the fintech industry.
This article discusses five of the developments venture
capitalists are watching out for when it comes to financial technology.
5) Blockchain technology and crypto assets
Distributed ledger technology, or blockchain technology for
short, is a way of recording transactions and tracking goods to improve
security, remove the need for third parties, enhance machine to machine
communication, and reduce prices. This category also covers cryptocurrencies
such as bitcoin or stablecoins.
According to Maxim Manturov, Head of Investment Research at
Freedom Finance Europe, "2022 VC investments in fintech are likely to
incorporate more blockchain technology, with the lure of decentralised finance
and the greater potential of smart contracts and peer-to-peer lending that's
entirely free of middlemen or third parties boosting the potential of
fintech."
"The blockchain ecosystem is fueling the growth of
future unicorns by offering more secure, cheaper, and faster ways to process
cross-border payments. Venture capital investments will further move into
crypto adoption as most household names present on the market catch up with the
trend and cater to consumer preferences. We are expecting to see large-scale
adoption of crypto for both SMBs and large corporations alike," added
Arvind Nimbalker, Global Head of Product at Tribal Credit.
4) Social Impact
Social entrepreneurship and innovation have been around
since the late 19th century, but they've grown in popularity as businesses
realise how influential their actions can be on society at large. In fact, a
recent working paper from INSEAD business school found that social enterprises
"can do a more effective job than a benevolent central actor such as the government."
Venture capitalists are interested in fintech that are
working on solving social problems because of this potential for large-scale
impact. They're also drawn to companies with a strong mission and purpose
beyond profit.
According to Antoine Argouges, Founder and CEO of
Tulipshare, "Activist investing is a great tool to effect corporate
change, and it can be a viable solution to counter corporate greed and
irresponsibility."
3) Underserved Markets
Another factor venture capitalists are watching out for is
businesses targeting underserved markets. Often these are places where there is
a high density of people who have been underserved by traditional financial
institutions, such as the unbanked and underbanked.
VCs are backing underserved markets which can be addressed
with the proven models tested in the US and the EU. Putting Asian super apps
aside, Brazilian and Indian markets are the hottest ones for investments, and
M&A. 2022 will show more deals in vertical aggregation in the M&A space
and more investments in the underbanked and underserved markets,"
explained Eugene Hauptmann, Founder of AwesomeFinTech.
At the end of the day, VCs are often looking for startups
that can scale quickly and capture the attention of consumers across multiple markets.
2) Environmental action
Another trend on the rise in fintech is environmental
action, and it mainly involves companies working towards reducing the impact of
humans on the environment. Often, this takes the form of sustainable or ethical
banking, where customers can choose a financial service provider that aligns
with their personal values.
According to Justas Kaveckas, CEO and Founder of FOROS,
"The emergence of sustainability and climate-focused fintech startups are
a natural evolution of the financial sector. They give a sense of purpose and
hope to millions of users around the globe that finance is not just about
numbers in your account but rather a force for so many good things. These
startups are attempting to do critical work to save our environment and make
our societies more inclusive."
1) Neobanks
The concept of neobanks is one of the most significant
categories to gain traction with venture capitalists. These are banks that have
been built from the ground up to be digital-only; they often have a very
user-friendly app and no physical branches.
"We see the neobanks as having the greatest potential
because they still enable generation of big checks and ensure quality margin
indicators thanks to a whole line of additional services," said Dmitry
Smirnov, General Partner at Flint Capital.
The bottom line
Venture capitalists are keeping a close eye on fintech, and
private investments in the industry exceeded $75bn USD in 2021. It is probable
this trend will continue in 2022, with VCs looking for startups they believe
can become industry leaders.
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