Is There a Major Shift Happening in Fintech Funding?

We already know that there is a fluctuation happening in where funding for fintech is going, with London bringing in more money and New York less, but there also appears to be a big change happening in where the funding for fintech startups is coming from as well, as Business Insider reports.

Business Insider notes that while venture capital firms invested about $117 billion in fintech startups between 2012 to 2016, they are now beginning to slow down the amount of money they are putting into the market. In fact, in a note sent to clients on May 18, a group of equity analysts at Morgan Stanley say there is now a “paradigm shift” happening in funding, with incumbents now beginning to pour money into fintech startups as VC firms pull back.

In a big note out to clients on May 18 titled “Fintech: A Gauntlet to Riches,” a group of equity analysts at Morgan Stanley said this shift will lead to an environment where legacy firms, or incumbents, “take the reigns”of financial innovation.

“Financials and payments incumbents are likely to be emboldened to step up R&D and take the investment lead, and this combination of VC/incumbent behavior represents a paradigm shift that should benefit incumbents’ [return on investment],” Morgan Stanley said.

The increase in funding from incumbents is likely in response to the threat of disruption that fintech startups present. While staving off possible competition, by pouring money into these startups, incumbents are also investing in innovation and bolstering their platforms with new technology.

However, global venture capital funding in fintech startups dropped to $25 billion in 2016 from $47 billion in 2015, according to Business Insider. Between 2012 to 2015, VC firms poured $92 billion in the space.

As investment in the fintech space grew, some market watchers began to grow concerned that valuations were reaching unreasonable levels, Business Insider reports.

“Pullback in fintech investment over the past year is indicative of a realization of lower [return on investments] than initially hoped due to some unique challenges to disrupting in the financials industry, and our suspicion is that VC investors will continue to scale back investing,” Morgan Stanley said.

Meanwhile, CB Insights reports that overall U.S. fintech funding and deal totals are on pace to fall in the first quarter by about 20% from the first quarter in 2016.

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