According to Dow Jones VentureSource, venture financing for fintech startups reduced drastically in Q4 of 2015. Even though the figure is still high considering the historical data, funding for U.S. startups fell by 20 percent from Q3 to Q4, the highest drop in 2 years. Additionally, the number of deals reduced to 310, an equivalent of an 11 percent reduction.
The fall matched the drop of share prices for some publicly traded firms in the industry, and the pressure is not winding down.
Nevertheless, 2015 remained the best for U.S. fintech venture investments since 2000. About $21.6 billion was invested in the fintech sector, of which nearly $4.9 billion came in the Q4. But 2015’s decline in number of deals was the first since 2009.
Lately, the market conditions for initial public offerings have also not been friendly.
There is optimism that technology will transform the financial sector. However, investors may see that the difficult market conditions will create more problems for fintech startups, even force some of them to form partnerships with banks or even close their businesses.
Analysts, investors and banks are still optimistic for a healthier market and a breakthrough for financial innovation.
Autonomous Research analysts have projected that the amount of loans given out by global digital lenders will reach about $100 billion by 2020. Out of this, about 10 percent will go to consumer loans and small businesses. They also said that there are over 2,000 digital lenders globally, with more expected to join the sector. Therefore some of the lenders will thrive, fail or be purchased by traditional financial institutions.
Many startup firms are likely to merge with big banks. According to Compass Point Research & Trading analysts, these partnerships reduce some of the risks as regulatory risks.
Some startup firms are still getting new financiers. According to Anonymous Research analysts, lenders with specific niche markets would be invulnerable to the competition.
Fixed-income investors have also continued to inject funds into the sector, as they target to receive higher returns than those offered by government bonds.
It is likely that earlier lenders now at scale will continue getting more capital. Investors and borrowers will start focusing on marketplace lenders that offer high-quality services which are sustainable, instead of just the new lenders.