Hey Fintech Friends,
Happy Q4. More importantly, welcome back to our quarterly round-up!
For new readers, Signals is the premium subscriber edition of TWIF designed to get you away from the headlines and to explore the larger trendlines. Each quarter, we break down four key questions on fintech activity:
Which concepts are getting funded?
Where are exits, M&A, and SPACs concentrated?
Which firms are raising debt and venture funds for fintech?
Which products were launched over the last quarter?
If you haven’t already, subscribe to future editions here!
Overall activity
Fintechs raised a total of $4.13 billion in Q3, down 16% from the prior quarter and down 29% Year-over-Year. The number of rounds raised dropped 7% QoQ, and rounds shrank 10% in average size QoQ.
See the full Q3 ‘23 data here (for paid subscribers only).
Across financial markets recession fears are abating, but the NASDAQ still fell 4.12% over the past quarter as investors came to terms with the prospect of interest rates persisting at or near their current levels through 2024.
Source: Reuters
These stabilizing market conditions prompted Instacart, Klaviyo, Better, and others to go public, with mixed results. Overall, total proceeds from IPOs are still up 159% relative to last year, which could spur further public listings in 2024 (👀 Stripe, Plaid*, Klarna, Checkout, Revolut..?).
In other news:
Cannabis businesses may soon be allowed to use financial and banking services in the US, pending Congressional approval of a bill that the US Senate Banking Committee advanced to the floor last week.
The US Fed launched FedNow, its real-time payments network (not to be confused with The Clearing House’s RTP, an existing platform run by a private consortium of banks) (for a deeper dive on US real-time payments, highly recommend this run-down by Jenny Johnston).
Let’s dive into fintech activity in Q3.
Which concepts are getting funded? 🤑
Venture funding continued to amass in early-stage rounds with a notable bump in Series C funding from Micro Connect, a Chinese SMB financing platform that closed $458 million in its latest raise.
See the full Q3‘22 data here (for paid subscribers only).
A lot of companies raised down rounds; others avoided re-valuation entirely by issuing convertible notes, or just re-branded raises as follow-ons (“Series A Plus”, “Pre-Series B”...).
[Succession Season 4, Ep 1] Nan: Different people saying different numbers… 8, 9, what’s next? Roman: It’s so confusing, what comes after 9? 9B?
Areas that received the most funding were:
Consumer digital banking, led by Nomad’s $61 million Series B, Bunq’s €44.5 million inside round (+announcement of plans to expand into the US), Albo’s $40 million Series C, and LemFi’s $33 million Series A.
See the full Q3‘23 data here (for paid subscribers only).
A few concepts received notable funding, including:
Carbon reduction, with funding to Revalue Nature and finres expanding solutions for carbon removal projects, to Pexapark, Opna, and Erguvan powering carbon offset marketplaces, and to Plan A, Persefoni, and ESG Bay furthering reporting tools needed to comply with emerging carbon accounting standards (the EU’s Corporate Sustainability Reporting Directive, for one, is coming into force for 50,000 companies in June 2024).
AI investment analysis, as Alphasense, Portrait Analytics, 73 Strings, and Intanify raised funding to enhance insights on portfolio opportunities, and Hadrius closed seed funding for its AI-powered SEC compliance platform.
Revenue maximization at checkout, with funding to Mattilda, Sofi, Collectly, Colleen, Croissant, Traction, Shinkansen, GlossGenius, Mural Health, Flash, Form3, Revio, HealNow, Givzey, Pi-xcels, Cubo, Chargeflow, Qashier, and Craftgate underscoring the need for payment processing solutions that help merchants realize the full value of their sales.
Employee stock ownership, as TeamShares, Common Trust, and Collective Liquidity’s raises enable employees to reap ownership of
the means of productionshares in their employers’ businesses.
Where are exits, M&A, and SPACs concentrated? 📈
A $40 billion merger between India’s largest private lender, HDFC Bank, and the country’s largest mortgage lender, Housing Development Finance Corporation, formed the world’s 4th largest bank (only behind JPMorgan Chase, Industrial and Commercial Bank of China, Bank of America).
In B2C payments, Walmart– already the biggest shareholder in PhonePe– doubled down on the Indian eCommerce market by taking an 80% stake in Flipkart. Meanwhile, vertical payment platforms consolidated across healthcare, with Waystar’s acquisition of HealthPay24; rent payments, with Velo Payments acquiring YapStone and RentRedi snapping up eRentPayment & PaymentReport, and prepaid cards, with Recharge acquiring gaming-focused payments platform Startselect.
Better.com went public via SPAC and the mortgage platform’s shares immediately tumbled by over 90%, reflecting the larger struggle that real estate-focused consumer financing businesses face in a higher-interest rate environment.
Which firms are raising debt and venture funds for fintech? 💰
The FinTech Growth Fundlaunched in the UK with £1 billion in backing from Barclays, London Stock Exchange Group, Mastercard, and NatWest to target growth-stage fintechs.
HSBCcommitted $1 billion in funding for climate-focused startups.
Ribbit Capital, an investor in early-stage fintechs, raised $800 million for its tenth fund.
Crypto payments company MoonPayunveiled MoonPay Ventures, an investment arm focused on early-stage Web3 projects.
Santander and Inveready Asset Managementcommitted €100 million in what will be Spain’s largest venture debt fund.
Thai megabank Kasikorn Banklaunched a $100 million venture fund to invest in Web3 and AI startups.
Luge Capital, a Canadian fintech-focused VC, raised an initial $71 million for its second fund.
Which products were launched over the last quarter? 🚀
Last quarter we called out near-term AI applications in business financial management. Circling back on this trend: TaxBit launched an AI-enabled rules engine for transaction reconciliation, Brex released an AI assistant for expense management, Primer rolled out UpliftAI to boost merchants’ payment authorizations, and Collective announced its $50 million raise will be used to build out AI for solopreneurs across its platform.
Following the release of real-time payments via FedNow, Plaid and Matera rolled out support for instant payments; DataVisor is offering machine learning tools to combat RTP fraud.
Fintechs are gearing up for the arrival of Central Bank Digital Currencies with technologies that enable interoperability between existing solutions and upcoming CBDCs:
Chainlinklaunched its Cross-Chain Interoperability Protocol (CCIP), a standard enabling cross-chain transactions that’s compatible with banks’ internal ledgers.
Stablesreleased the first stablecoin wallet in APAC, built on Mastercard’s CBDC infrastructure.
The European Payments Initiativeunveiled its digital wallet, “wero”, which could support the EU’s planned CBDC roll-out.
Q3’23 Roundup
It's been impossible to ignore developments in central bank digital currencies over the past quarter.
Stay with me here– 90% of central banks, including those of all G7 countries, are exploring some form of CBDC. So far 32 countries have piloted or launched a CBDC program, with the EU announcing Tuesday that its wholesale CBDC is slated for release "in the coming weeks":
Source: Atlantic Council Geoeconomics Center
Central banks first started looking into CBDCs out of concern that stablecoins issued in the private sector could destabilize the larger financial system. These stablecoins– issued by companies like Tether, Circle, and most recently, PayPal– have now reached $124 billion in global market cap. In comparison, government-issued CBDCs are struggling to get off the ground: The Bahamanian Sand Dollar– the world's first CBDC– only accounts for .013% of the country's money supply; China's eCNY, now two years into its pilot, stands at .13% of the money supply, and India's digital rupee has only onboarded about .125% of the population in the year since it was released.
It's important to call out the distinction between 1. Retail CBDCs, designed for individuals and businesses to conduct (typically) low-value, high-volume transactions, and 2. Wholesale CBDCs, supporting the movement of money between financial institutions for the purpose of settling securities trades, cross-border transfers, etc.
There are still a lot of open questions as to where retail CBDCs go from here. Wholesale CBDCs, on the other hand, stand to disrupt two major areas of the global financial system within the next year.
Cross-border payments
We've talked about the nightmare that is cross-border transfers, and how growing complexity in the correspondent banking system is only making it harder and costlier to move money internationally. Central banks and financial institutions are looking to CBDCs to bypass these complexities, starting with B2B payments– a use case that currently accounts for 86% of of cross-border transfers.
In May, the New York Federal Reserve and the Monetary Authority of Singapore announced the success of a transfer made between the two countries using a decentralized ledger.
Last month, the Bank for International Settlements announced it was working with the central banks of France, Singapore and Switzerland to test wholesale CBDCs in cross-border trade payments.
In parallel, large companies are also exploring using stablecoins to transfer funds to other private sector actors. In June SAP (the largest non-American software company by revenue) piloted a cross-border USDC transfer solution with customers, while JP Morgan is seeking regulator approval for an inter-bank blockchain payment system that could eventually support cross-border transfers (separately, JP Morgan has used JPM Coin to facilitate $300 billion in internal transfers via in-house blockchain).
Financial markets
Financial institutions similarly have to wait days for payments to settle when trading securities with international counterparties. You can imagine how quickly the cost of these settlement windows adds up in a $19 trillion industry. The Global Financial Markets Association estimates that CBDCs could save financial markets over $100 billion a year by freeing up collateral for financial institutions.
Another benefit of using CBDCs here is the ability to program smart contracts that govern the underlying securities. International settlement systems like the EU’s TARGET2-Securities already offer a combined settlement platform for securities and cash accounts. Building on this framework, the GFMA finds that smart contracts– by automating back-office tasks related to trade execution, stock splits, mergers, etc.– could lower financial institutions’ operational costs by another $15-$20 billion yearly.
The sheer scale of global B2B payments and financial markets make these two obvious starting points for central banks and financial institutions deploying CBDCs. Near-term, CBDCc stand to transform international commerce and surrounding industries like trade financing. From there it’s only a matter of time before this infrastructure is retooled to support consumer payments, unlocking value across use cases like eCommerce and P2P remittances.
*My former employer 👋🏽
