Investor Behaviour Towards FinTechs in 2021
Recent data from Innovate Finance reveals that FinTechs have raised more than they did in the whole of 2020. 34% increase has been witnessed since about US$5.7bn have been made in 2021 as compared to US$4.3bn in 2020.
UK FinTechs raised this sum of money across 317 deals, including 13 mega-rounds of over 100m, more than double the seven completed across 2020. In the words of Janine Hirt, CEO of Innovate Finance, “This clearly demonstrates that the appetite among international investors to fund high-growth innovative firms has never been greater, and is a testament to the UK’s position as a world leader in FinTech.”
In this article, we’ll discuss three main factors defining investor behaviour towards FinTechs in 2021. Let’s have a look:
Covid-19 Pandemic and the Need for Digital Products
Covid-19 has accelerated the need for digital products and services. This has driven increased investments in FinTechs globally, with about $54.1bn invested between January and June this year. According to a joint study by the World Bank, the Cambridge Centre for Alternative Finance at the University of Cambridge’s Judge Business School, and World Economic Forum, FinTech has continued to help expand access to financial services during Covid-19. Access to affordable financial services is crucial for poverty reduction as well as economic growth. For poor people, access to basic financial services can raise incomes and increase resilience by improving their lives. Extending upon this reality, Caroline Freund, World Bank Global Director for Finance, Competitiveness and Innovation, states that, ‘FinTech has shown its potential to close gaps in the delivery of financial services to households and firms in emerging markets and developing economies.”
Popularity of DeFi
DeFi has seen a strong start in 2021, with global investments reaching US$6.3 bn from US$400mn in H1 of 2020. A potent reason why retail investors are attracted to DeFi is that there is no centralised authority with the power to control transactions. DeFi protocols are offering similar products and services to the traditional financial ecosystems but in a fully digital and decentralised way. At a faster pace and lower costs, they are making their offerings available to everyone without any intermediaries, jurisdictional or geographical barriers.
DeFi’s democratised access to illiquid, exotic and privately held assets is another reason for its popularity. Assets that small investors did not have access to in traditional finance are now within their reach in DeFi.
Forthcomingness of Regulators
Another factor defining investor behaviour in FinTech is the forthcomingness of regulators, including the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority, both of which have encouraged competition across financial services in the wake of the 2008 global financial crisis in an effort to combat the spate of M&A’s that concentrated risk across a handful of lenders. The result of this was a more cordial relationship with start-ups and the creation of programmes such as fintech sandbox that allows early-stage companies to test their products for a limited number of customers before the firms are licensed, all while being supervised by the regulator.