The amount of investment in venture capital backed fintech companies is well documented but how much value is being created and how does that relate to the value of established financial services companies?
There are various sources of data on fintech investment levels but the one we have used is from CB Insights. According to this source, the total investment in venture capital backed fintech companies from 2012 to 2016 on a global basis was $41bn. From 2009 to 2012 there was probably another $1-2bn of investment per year.
If we assume that venture capital firms expect to make a return multiple of around 3x the original investment across a portfolio of investments, we can calculate the notional value that has been created from these fintech investments. We also have to assume what proportion of the companies the investors own and we have estimated this from the cases of Square and Lending Club at the time of their IPOs – it was approximately 50%. A final assumption is that 25% of the amount invested in so-called fintech is not actually in companies which are competing with or disrupting the industry but they are in fact just suppliers to established companies. This figure could be a lot higher, depending on how fintech is defined.
The result of this calculation is a notional value of $203bn for the fintech companies in which venture capital firms have invested over the past 8 years. On a regional basis, it is $115bn in the United States, $23bn in Europe and $65bn elsewhere.
This is a large figure, but relatively speaking it is still quite small for the global financial services industry. For example, as of 19th February 2017, the market value of Visa Inc. was $203bn. A leading domestic bank in the United States, US Bancorp, was valued at $93bn. In Europe, Lloyds Bank was valued at $60bn and BBVA at $43bn whereas our calculation for the notional value of fintech investments in Europe is only $23bn.
Of course, the fintech companies already established will grow and investment in fintech will continue so therefore the notional value of the new players will increase each year. Furthermore, there may be even more value destroyed for the incumbent players than the value that is created for the new players as margins are under continuing pressure, so the impact on the existing companies in the industry could be much higher than this calculation implies. However, it is clear that the vast size of the global financial services industry means that the level of fintech investment we have seen so far from venture capital companies is actually quite small in comparison.
Michael Pearson, 27th March 2017