Financial technology, from peer to peer networks through crowdfunding, is transforming the industry.
And it’s getting recognition from investors, as more than $18 billion has been injected into the industry in the past year.
But private investors are overwhelmingly favouring two types of fintech companies. While Square dropped out with an IPO last week, 14 of the 18 privately held financial technology products with a valuation over $1 billion (unicorns) are still in the payments or lending space, according to CBInsights.
The divergence between payments and lending and other fintech companies can be explained by two phenomena: a) lending is really profitable and b) many of the world’s payments networks are awful.
Online lending, especially at point of sale or using non-traditional data for risk evaluation, are incredible businesses. Australia’s ZipMoney got a $100 million loan facility from a US asset manager last week to finance its lending operation.
And, as Business Insider pointed out last week, Square Capital may be the most exciting part of Square.
Square Capital was only set up in May 2014 but has already processed more than $400 million in cash advances in that time. That is more than $1 million a day in loans to small businesses, and according to Fortune, Square charges a 10% fee on some of these transactions.
The fee varies depending on “how well the business is doing” – using Square’s view of the company’s cash flow as a proxy for business health.
Meanwhile, more than half of the payments companies come from countries with financial infrastructure ripe for disruption. Square, Stripe and Mozido all come from America – where over half of the companies still use cheques.
One97 operates its mobile payments network from India, where more than 200 million people remain unbanked, and remittance startup Transferwise was famously started by two Estonian expats.