Big data, mobile apps fuel surge in fintech venture funding

Fueled by trends in mobile computing and big data, funding for venture-capital startups in financial technology has risen sharply in recent years, enabling new players to challenge incumbents, a leading academic in the field said.

Interest remains strong as fintech beckons both traditional players and startups by offering a deeper understanding of consumer spending, lending and loan origination.

“We have much more powerful tools available in how we monitor consumers,” Antoinette Schoar, finance professor at MIT Sloan School of Management, said in a keynote address at an MIT conference on Sept. 16.

While older financial-services and credit-card specialists may have been initially challenged by upstarts, established companies are more often collaborating with younger innovators on a wider scale, she said.

That’s attracting investment in venture-backed fintech companies as a way to slash transaction costs, better screen potential customers, and develop more powerful ways to track consumers.

“Banks and consumer-product firms are starting to embrace behavioral finance and psychology to shape their products,” Schoar said.

Big data also has a darker side: Fintech enables credit-card companies to target consumers who are more compulsive buyers with card offers that hide higher fees and penalties in the fine print, she said.

All this has fueled steep increases in consumer-oriented fintech firms.

Second-quarter investments in venture-backed fintech companies fell 52 percent to $2.5 billion from $5.2 billion in the year-ago quarter, but they remain well above 2011-2013 levels, industry data cited by Schoar shows.

So far in 2016, venture-backed fintech companies drew $7.4 billion in investments, beating out the levels of 2011-2013. For all of 2015, the sector drew $14.5 billion in investments, double the $7.3 billion in 2013.

Nowadays roughly 1,853 names occupy the universe of venture-backed fintech companies.

The payments business of fintech ranks as the largest of 13 subsectors, with 510 companies including Braintree, iZettle, Protean, Square, Stripe, Venmo and WePay,

The lending subsector ranks No. 2 with 434 companies, including Affirm, Borro, Earnset, Kabbage, LendingClub, onDeck and Prosper.

Schoar spoke at “Fintech and the Disruption of Finance: Perspectives from MIT Sloan” at the TimesCenter in Manhattan.

Action Item: New York Fintech Conference: http://mitsloan.mit.edu/alumni/events/2016-nyc-fintech-conference/

A model shows a pay-by-the-wrist contactless payment using a Swatch Bellamy watch via Visa credit-card system during a presentation of the Swiss watchmaker in Zurich on June 16, 2016. Photo courtesy Reuters/Arnd Wiegmann