U.S.-based fintech companies raised $14.8 billion in 2019, according to an S&P Global Market Intelligence analysis.
Of the six fintech segments we track, insurance technology stood out with the largest total amount raised. The segment's $3.8 billion of funding in 2019 was buoyed by a massive investment in Bright Health Management Inc. in December. The digital lending and payments segments raised roughly the same aggregate amounts — $3.2 billion. However, digital lenders required about 39% fewer transactions to hit that mark, showing the highest average value per transaction of any fintech segment. Banking technology companies also saw a series of large transactions that funded so-called neobanks, which are digital-only consumer-facing banking platforms.
Early stage venture capital firms typically spread bets across a wide range of prospects. Companies that show early signs of traction are subsequently able to attract large funding rounds to fuel their growth. This pattern was clearly on display in the fintech space in 2019. While about three-quarters of transactions with disclosed funding amounts were sized at $25 million or less, the top 10% of transactions accounted for over 60% of aggregate funding. Most of these companies had raised multiple funding rounds before. The vast majority of these top 10% rounds raised $100 million or more. Below is a closer look at three fintech sectors where $100 million-plus transactions highlight important industry trends.
Full-stack insurtech companies continue to attract funding
The full-stack insurance model saw continued investor support in 2019. Bright Health Management raised $635 million, the largest individual funding round of the year among U.S. fintech companies. With cumulative funding of $1.1 billion. Bright Health is part of a growing cadre of vertically integrated, full-stack insurance technology startups. With their own underwriting operations, these companies bear the risk of their policies, have more control over their product design and compete directly with incumbent carriers. S&P Global Market Intelligence anticipates that this trend toward vertical integration will grow over time, as detailed in the 2019 U.S. Insurtech Market Report. Other full-stack insurtech companies that had funding rounds of $100 million or more in 2019 were Clover Health Inc., Lemonade Inc., Root Insurance Co. and Next Insurance Inc., which focus on various personal and commercial lines of business.
Large injections of investor funding are particularly important for the capital-intensive full-stack insurtech model, given regulatory capital requirements and the need to pay out claims immediately while earning premiums over time. Meanwhile, rapid growth is common across business lines. For example, Bright Health grew direct premiums written from $30.9 million in the third quarter of 2018 to $64.1 million in the same quarter of 2019. Meanwhile, Root Insurance grew its direct premiums written from $32.8 million to $119.5 million over the same period.
The opportunity and necessity for growth will likely push these companies to continue investing heavily in their expansion efforts in order to diversify and gain market share.
Investors target wide range of digital lender business models
Investors placed big bets on various digital lending business models in 2019. The segment saw 12 funding rounds of at least $100 million, more than any other fintech category.
The largest round was raised by Social Finance Inc. which collected $539 million from the Qatar Investment Authority. One of the nation's largest digital student loan refinance companies, SoFi has aggressively differentiated its business over the last several years and positioned itself as a holistic financial services provider competing directly with incumbent banks for customers. With a $102.5 million funding round in the books, small business-focused lender BlueVine Capital Inc. has also announced its intention to launch a digital banking product in conjunction with The Bancorp Inc.
Expansion into adjacent financial services is a widespread pattern in the fintech space. For digital lenders, this facilitates deeper customer relationships that can be leveraged for cross-selling, open up new avenues for growth and potentially improve profitability. Some digital lenders have even expressed interest in obtaining banking charters.
Another theme in digital lending is the promise of alternative data in opening up credit access to people with limited traditional credit profiles. Many digital lenders have experimented with the use of alternative data points, but some have focused their businesses around this particular practice more than others. For example, Branch International Inc. and InVenture Capital Corp., which does business as Tala, lend to individuals in emerging markets who may not have any traditional credit history. Instead of relying on credit scores, these companies use data from consumers' mobile devices to underwrite loans. The companies raised a combined $280 million in 2019.
Lendbuzz Funding LLC, which raised $150 million in debt and equity in 2019, applied similar logic to the U.S. market. It offers car loans to expatriates and international students who may struggle to borrow from traditional lenders due to their limited history in the U.S. Lendbuzz claims to incorporate nontraditional data points such as education and earning potential into its underwriting.
US neobanks hitting an inflection point
Chime Financial Inc. raised the most capital of any individual fintech company in 2019, collecting $700 million across two transactions. Several other digital banking providers — Moneylion Inc., Varo Money Inc. and Dave Inc. — collectively raised $250 million in 2019.
These companies have built their businesses to compete directly with retail banks by offering deposit products wrapped in customer-friendly features such as early direct deposit and zero overdraft fees. They are raising capital at a time when competitors are appearing from various directions.
Other fintech companies are moving more aggressively into baning. Square Inc. has filed for an industrial loan company charter, and digital lender LendingClub Corp. recently announced its purchase of Radikus Bank. Several prominent, private fintech companies have also launched or announced some kind of deposit or cash management product. These include well-funded startups such as SoFi, BlueVine, Robinhood Financial LLC and Brex Inc.
Larger consumer technology companies made significant strides into financial services in 2019. Apple Inc. launched its Apple Card credit card product, and Google LLC announced a deposit product in conjunction with Citigroup Inc.. These companies have significant consumer reach and large pools of capital to deploy into product development and customer acquisition.
Foreign competitors made meaningful attempts to enter the U.S. market in 2019. German neobank N26 GmbH launched a U.S.-based service while U.K. neobanks Revolut Ltd. and Monzo Bank Ltd. have announced intentions to launch U.S. products. All three have seen substantial growth in Europe where neobanks appear to have gained greater traction. Unlike their U.S. counterparts, these European companies have banking licenses in their home countries.
The influx of new capital into major U.S. players will provide plenty of fuel for customer acquisition and other growth initiatives to face the growing competition.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.