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Explore the 2020 Fintech Sector

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White Star Capital's H1 Deep Dive on the Fintech Sector Landscape

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Explore the 2020 Fintech Sector

  1. 1. White Star Capital Sector Overview: Fintech From the eyes of an international investor H1 2020 1
  2. 2. White Star CapitalWhite Star Capital Contents 2 Section 1 Fintech Ecosystem: An Overview Section 2 Sector Focus Personal Finance Insurance Financing & Lending Business Operations Tools Payments Finance-as-a-Service Regtech Section 3 Geographic Outlook US Canada Europe Japan & South East Asia Section 4 Partnering with White Star Capital 4 13 53 59
  3. 3. White Star Capital The 2nd Wave of Fintech 3 Source: Pitchbook 788 Deals $8bn Invested in Asia in 2019 911 Deals $7bn Invested in Europe in 2019 1,407 Deals $19bn Invested in North America in 2019 Since its founding, White Star Capital has been investing into entrepreneurs pioneering change in both the consumer experience and supporting infrastructure of fintech, throughout North America, Europe and Southeast Asia. The unbundling of banks has been the most defining trend of fintech over the last decade. New customer centric entrants have emerged, determined to improve the user experience, transparency and value-for-money, mainly focusing on single product offerings. Large financial institutions have found themselves needing to innovate to compete. Globally, from money transfer to banking, lending to payments, insurance to financial business tools, fintechs have taken in over $180bn of venture capital funding, across almost 23,000 deals over the last 20 years, with several unicorns and decacorns being born as a result. Fintech is now an established and highly sought after sector, and as we enter into a new decade, we believe we are now witnessing the second wave of Fintech innovation, led by 2 mega trends: 1) The development of core banking infrastructure and enabling technologies, allowing both incumbent financial service providers to reimagine their back-ends and non-financial companies to deploy financial products to supplement their offerings 2) The increased specialisation of financial and insurance offerings to their target group’s needs, with single product players rapidly expanding their offering to cater for all needs allowing them to diversify their revenue streams and increase their share of wallet There are still many problems to be solved and untapped opportunities, particularly around the distribution of products and services, a shifting customer need with ageing populations and the ability to strike the right balance between innovation and consumer protection.
  4. 4. White Star CapitalWhite Star Capital Fintech Ecosystem: An Overview
  5. 5. White Star CapitalWhite Star Capital 2019 Fintech Highlights 5 Source: Pitchbook (1) Rounds >$100m. (2) CIFTI50 as of 31-Mar-2020. Fintech Ecosystem: An Overview $104bn Fintech funding over the last 3 years 14% Share of VC funding invested in Fintech over the last 3 years globally 58 VC-backed fintech unicorns 12% Share of seed funding invested in Fintech over the last 3 years globally 192 Fintech IPOs over the last 10 years 200+ Mega rounds in total1 +64% Share price performance of the top 50 public fintech companies since 20162
  6. 6. White Star CapitalWhite Star Capital 318 452 656 923 1,070 1,144 1,575 1,298 1,407 226 108 177 298 501 634 814 1,020 985 911 168 299 605 699 1,008 836 788 110 138 229 158 207 495 770 1,199 1,800 2,419 2,795 3,832 3,277 3,313 479 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America Europe Asia Rest of World Funding has grown c.45% yoy since 2011 as businesses and financial institutions innovate to serve growing financial expectations 6 Source: Pitchbook Fintech Ecosystem: An Overview North America and Asia have led the world from a deal value perspective, with mega-rounds from start-ups like Paytm, Ant Financial, Opendoor and SoFi driving activity On the other hand, Europe, has grown its share in deal volume significantly over the years by c.20% $8.6bn $7.8bn $15.0bn $8.2bn $18.7bn$1.9bn $2.0bn $4.0bn $3.9bn $7.3bn $7.8bn $11.8bn $25.8bn $10.0bn $8.4bn $1.8bn $2.5bn $3.5bn $8.8bn $18.5bn $21.9bn $45.5bn $22.4bn $35.8bn $7.0bn 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America Europe Asia Rest of World Deal Value Deal Volume
  7. 7. White Star Capital +[xx]% Growth in share of deals from 17-19 Globally, the fintech ecosystem is maturing as seed funding declines and later stage funding steps to the forefront 7 Fintech Ecosystem: An Overview The most mature of these regions include China, UK, USA and Germany, where series D+ rounds becoming common place China SEA France UK Scand. Canada USA Germany Seed share of deals 20% 48% 43% 49% 64% 56% 47% 41% (12.3)% (5.8)% (16.5)% (8.9)% (12.1)% (5.5)% (3.0)% (9.9)% Series A share of deals 45% 35% 32% 30% 27% 25% 24% 22% 11.0% 0.9% 18.0% 9.9% 115.3% (8.1)% (2.9)% (8.6)% Series B share of deals 20% 11% 18% 10% 9% 19% 15% 19% (11.2)% (2.6)% 7.7% 0.8% NA 125.0% 11.4% 62.0% Series C share of deals 9% 5% 7% 6% 0% 0% 6% 6% (8.7)% NA NA 80.5% (100.0)% NA 2.1% (33.9)% Series D share of deals 6% 1% 0% 3% 0% 0% 3% 9% 104.2% NA NA 67.1% (100.0)% (100.0)% 11.3% NA Series E+ share of deals 1% 0% 0% 2% 0% 0% 4% 3% 17.9% NA NA (21.2)% NA NA 7.1% 14.6% Source: Pitchbook Share of deal volume by deal stage type (2019)
  8. 8. White Star CapitalWhite Star Capital Increasing valuations from the growth in popularity of venture capital is most present in fintech with valuations growing 13% yoy globally 8 Source: Pitchbook (1) Asia excludes all rounds from CRED and Bharat Pay. (2) Europe excludes WeFox, Pleo, Alan and Curve’s Series B rounds Note: Please note Pitchbook valuation data has limitations and only considers rounds that have officially announced valuations. For this reason, Africa and South America have been excluded. Fintech Ecosystem: An Overview However, European valuations are c.35% lower than the rest of the world Outsized rounds are becoming common place around the world too as investors compete for the most promising fintechs $9.0m $4.5m $4.5m $24.1m $72.0m $13.3m $90.0m $120.0m $67.3m Seed Series A1 Series B2 North America Asia Europe Checkout.com Series A: $230m (2019) UK WeFox Series B: $235m (2019) Germany Pleo Series B: $56M (2019) Denmark Seyna Seed: $15m (2019) France Next Insurance Series A: $83m (2018) USA Borrowell Series A: $44m (2017) Canada Bright Health Series B: $160m (2017) USA Bakkt Series A: $300m (2020) USA YouTrip Seed: $26m (2019) Singapore epiFi Seed: $13m (2020) India Blackfish Series A: $145m (2018) China Fapiaoer Seed: $140m (2019) China Median pre-money valuation Selected outsized funding rounds +14.1% +14.7% +7.0% +9.6% +19.0% (6.2)% +17.6% +4.9% 10.6% +[xx]% Growth in valuations from 14-19
  9. 9. White Star Capital Deal sizes are consistently growing in the most mature regions 9 Source: Pitchbook Fintech Ecosystem: An Overview Median deal size 17-19 CAGR 11.8% 18.8% 10.0% Seed Series A Series B USA $22.0m $9.3m $2.5m 4.3% (1.2)% (11.7)% Seed Series A Series B Canada $33.5m $8.5m $1.5m 72.8% 14.3% 38.3% Seed Series A Series B China $28.1m $10.0m $4.4m 0.0% 62.5% (1.0)% Seed Series A Series B SEA $12.8m $9.3m $1.0m 52.2% 8.1% 52.4% Seed Series A Series B UK $29.0m $6.5m $1.9m 20.4% (16.0)% 4.9% Seed Series A Series B France $22.5m $6.6m $2.5m (15.5)% (0.3)% 49.6% Seed Series A Series B Germany $31.8m $8.7m $1.6m 28.5% 45.4% 0.0% Seed Series A Series B Scandinavia $29.7m $7.6m $1.9m [xx]% Median deal size (2019)
  10. 10. White Star Capital $200m Growth (Jan-20) Sweden Mega rounds in US and China have become routine given market sizes 10 Source: Pitchbook Note: Mega round refers to a round of $100m+. Rounds shown are largest 4 equity rounds in that year. Fintech Ecosystem: An Overview Mega rounds are a growing trend in Europe, as its status as a recognised fintech hub has attracted international investors seeking to deploy more capital North America Asia Europe South America $400m Series F (Jul-19) Brazil $150m Series E (Mar-18) Brazil $231m Series D (Jun-19) Brazil 2019 2017 2016 2018 2020 $460m Growth (Aug-19) Sweden $470m Series D (Jul-19) Germany $230m Series A (May-19) UK $238m Series F (May-19) India $1.7bn Series G (Dec-19) India $200m Growth (Apr-19) China $225m Growth (Oct-19) China $1.5bn Series D (Nov-18) UK $250m Series C (Apr-18) UK $160m Series C (Mar-18) UK $725m Series E (Sep-18) US $750m Growth (Sep-18) US $538m Growth (May-18) US $2.0bn Series B (Jul-18) China $14bn Series C (Jun-18) China $280m Series E (Nov-17) UK $153m Growth (Jul-17) Switzerland Kabbage $250m Series F (Aug-17) US $250m Series E (Dec-17) US $808m Series A (Dec-17) China $1.4bn Growth (May-17) India $267m Series B (Jan-17) China $210m Series C (Dec-16) US $160m Series C (May-16) US $180m Growth (Oct-16) US $4.5bn Series B (Apr-16) China $433m Series D (Mar-20) Australia $500m Series H (May-19) US $635m Series D (Dec-19) US $500m Series A (Sep-19) US $400m Series F (Mar-20) US $700m Series E (Mar-20) US $300m Series B (Mar-20) US Mega rounds by region • Europe has been at the forefront of the neobank revolution, given European’s particular distrust in banks following the global financial crisis • Lending and health insurance start-ups lead the way in America which is likely due to the more positive attitude the American population has towards credit and the absence of state-funded healthcare • Cashless payments are “king” in Asia given consumers significantly higher propensity to fintech adoption vs other regions $150m Series B (Jun-20) UK $191m Series C II (Apr-20) Japan $400m Growth (Feb-16) US $300m Series F (Jun-17) US $500m Series G (Mar-17) US $375m Growth (Aug-18) US $500m Series E (Jan-19) US $850m Series G (Apr-20) US $1.0bn Series A (Feb-16) China $600m Series B (Sep-16) China $476m Growth (Jul-16) China $410m Series B (Jul-17) China $1.0bn Series D (Sep-18) China $1.5bn Growth (Dec-18) China $205m Growth (Oct-17) UK $134m Series E (Dec-18) UK $235m Series B (Dec-19) Germany $500m Series E (Feb-20) UK
  11. 11. White Star CapitalWhite Star Capital Strategic M&A drives over 50% of exits in North America, Asia and Europe 11 Source: Pitchbook Fintech Ecosystem: An Overview Embracing financial technology has become a focus, not just for incumbent financial services, but for the technology and e-commerce ecosystems too 1 1 2 3 1 4 5 7 8 6 1 17 13 24 29 39 9 22 19 33 40 46 10 2015 2016 2017 2018 2019 2020 Q1 Europe 3 1 3 3 5 6 12 5 17 21 4 40 39 50 47 51 12 49 52 58 67 77 16 2015 2016 2017 2018 2019 2020 Q1 NorthAmerica 4 2 8 7 11 1 3 2 1 1 4 5 7 20 14 12 5 12 11 29 22 27 6 2015 2016 2017 2018 2019 2020 Q1 Asia 25 21 34 42 48 1 1 1 1 2 2 2 2 3 28 23 37 45 52 10 2015 2016 2017 2018 2019 2020 Q1 SouthAmerica&Africa $5.5bn IPO (Oct-17) China $7.3bn IPO (Jun-18) Netherlands $2.2bn Acq. by PayPal (May-18) Sweden $1.4bn IPO (Sep-18) UK $5.3bn Acq. By Visa (Jan-20) USA $2.9bn IPO (Nov-15) USA $4.7bn IPO (Dec-14) USA Finvolution $3.7bn IPO (Nov-17) China OneConnect $3.4bn IPO (Dec-19) China $1.1bn IPO (Dec-14) USA $1.3bn IPO (Dec-19) USA 51credit $1.2bn IPO (Jul-18) China $713m Acq. by PayPal (Sep-13) USA Lakala Payment $1.8bn IPO (Apr-19) China $2.3bn IPO (Dec-18) China Exits by type Selected vc-backed exits
  12. 12. White Star CapitalWhite Star Capital There are a number of other fintech start-ups that have raised a significant amount of capital and are approaching unicorn territory too…2 There are 58 vc-backed fintech unicorns globally, with the payments sector owning the lion’s share 12 Source: Pitchbook (1) Amount shown corresponds to the last reported valuation. (2) Amount shown corresponds to total amount raised. Note: Unicorn: a vc-backed company that has publicly announced a fund raising round at a valuation at or above $1bn. Fintech Ecosystem: An Overview $4.8bn US $35bn US $1.2bn US $2.9bn US $1.2bn US $7.6bn US $1.0bn Brazil $4.9bn US $2.0bn US $3.7bn US $8.1bn US $3.8bn US $1.7bn US $2.1bn US $1.1bn US $1.3bn US $1.0bn US $1.9bn US $2.6bn US $1.0bn US $10bn US $1.0bn US $3.0bn US $1.0bn US $1.0bn US $1.0bn US $1.0bn US $1.0bn Brazil $5.8bn US $1.7bn US $3.0bn US $1.1bn US $1.9bn US $1.5bn US $1.4bn US $5.5bn UK $2.8bn UK $2.5bn UK $3.5bn UK $2.0bn UK $1.2bn UK $3.5bn Germany $1.9bn Germany $1.1bn Germany $5.4bn Sweden $1.0bn Switzerland $17bn India $1.5bn India $1.5bn India $1.3bn India $1.0bn China >$1.0bn Hong Kong $1.4bn China >$1.0bn China $1.7bn Australia $2.2bn South Korea $1.0bn Japan Asia (11) 1 Europe (11) 1Americas (36)1 $3.5bn US $388m UK $282m UK $303m France $195m UK $106m France $573m US $550m USA $559m USA $434m USA $190m USA $307m India $45m Japan $58m China $299m India $177m Australia
  13. 13. White Star CapitalWhite Star Capital Sector Focus
  14. 14. White Star Capital The White Star Capital perspective on fintech segmentation 14 Sector Focus At White Star Capital, we approach fintech from the view of its constituent use case building blocks Consumer Facing Solutions Personal Finance Insurance Financing & Lending Products and solutions used by consumers to better manage their finances • Digital banking • Bill management • Insurance • Credit and loans • Remittance • Trading • Investment and advisory Enterprise Finance Solutions Business Operation Tools Insurance Financing & Lending Payments: PoS & Checkout Products and solutions used by businesses to manage their finances • Digital banking • Expense management • Insurance • Financing and loans • Point of Service Systems (PoS) • Checkout services • Payment Gateways • Payroll management • Accounting Infrastructure Payments: Infrastructure Fintech-as-a-Service Security, Analytics & Compliance Underlying products and solutions used by businesses to provide their core services to consumers or other businesses • Payment Service Providers (PSPs) • Banking-as-a-Service • Insurance-as-a-Service • Fraud management • Open banking tools • KYC • Data analytics
  15. 15. White Star CapitalWhite Star Capital The White Star Capital perspective on fintech segmentation 15 Source: Pitchbook, Payments and Commerce Market Guide 2019 Sector Focus Consumer Finance Solutions Enterprise Finance Solutions Personal Finance Business Operation Tools (BOT) Insurance Financing & Lending Payments: PoS & Checkout Infrastructure Payments: Infrastructure Fintech-as-a-service Security, Data & Analytics Banking Bill Management Loyalty & Rewards Banking Solutions Expense Management P&C Distribution Banking Insurance Regulatory affairs Data security & transaction monitoring Identity verification & KYC PoS Checkout Money Transfer Investment & Advisory Brokerage Insurance Life & Health Non-Life Distribution Remittance E-Wallets & Account Aggregators Student Finance Financing & Lending Real Estate Point of Sale Financing Credit Scoring Consumer Loans Salary-Based Finance Payroll Accounting PSPs Payout Solutions Execution & Settlement PSP Enablers
  16. 16. White Star CapitalWhite Star Capital Personal Finance
  17. 17. White Star CapitalWhite Star Capital Consumer expectations from their banks are higher than ever 17 Source: Pitchbook, news press Sector Focus: Personal Finance Personal finance: An Introduction Personal finance is now one of the top funded sub- sectors in fintech Deal value & volume Financial management refers to the control, planning and organization of one’s finances in order to achieve a particular goal, whether it is putting money aside for a short-term expenditure (e.g. buying a car or a holiday) or other longer term plans (e.g. planning for retirement or saving for education). From the birth of the Internet in the 1990s, money handling has been shifting away from cash, to other digital forms. Now with the rise of mobile money during the 2000s, through a broad range of personal finance services, consumers are changing the way they spend, save and manage their finances. This has propelled the unbundling of financial institutions, with new players offering services optimised for specific products such as digital current accounts, e-wallets, account aggregators, remittance, bill management, savings & investments, brokerage, loyalty and reward tools. As these players look to diversify and increase their share of the custome wallet, the rebundling of these services is now in full swing. # Deal volume $635m $522m $837m $1,104m $898m $1,216m $1,355m $2,736m $4,065m $1,314m $973m $1,264m $2,061m $863m $680m $577m $1,022m $1,292m $1,272m $1,655m $2,328m $4,000m $6,126m $2,177m 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD North America Europe Southeast Asia 175 90204 315 361 421 485 447 473 476
  18. 18. White Star Capital The below start-ups have completely changed the way people interact with their personal finances 18 Source: Company websites, press, Pitchbook Note: total raised includes both equity and debt financing. $845m raised to date Selected Investors $1.0bn raised to date Selected Investors $220m raised to date Selected Investors Raisin (Germany) offers a marketplace for savings and investment products Agreements with a network of European banks, allow Raisin to seamlessly connect customers with banks searching for higher yielding, safe, deposits $910m raised to date Selected Investors Robinhood (US) is a mobile trading app where customers can invest in stocks, ETFs, options and cryptocurrencies Robinhood disrupted the brokerage industry with commission free trading, subsidised by interest on customer assets, premium subscriptions, margin trading and high frequency trading $400m raised to date Selected Investors TransferWise (UK) offers a cheap global money transfer service Through an intelligent network of bank accounts, Transferwise enables customers to send money globally, without the money crossing borders. Due to TransferWise using its own network with no intermediaries, it is able to offer very low prices Revolut (UK) offers a mobile platform for a number of financial services including banking, trading and currency exchange Revolut initially entered the fintech space with its free money- exchange service and customer-centric mobile-only interface Chime (US) is a neo-bank which provides financial services through a mobile app Chime changed the way people bank, offering a free basic bank service through a smooth mobile-first experience Sector Focus: Personal Finance
  19. 19. White Star Capital 19 Sources: Press releases, Cisco, Android rank Sector Focus: Personal Finance Regulation has favoured innovation • Consumers have experienced tremendous change in their customer journey with the rise of mobile apps offering fast, transparent and frictionless processes • However, financial institutions have been slow to innovate and adapt to rising customer expectations, held back by outdated banking systems that are expensive, complex and risky to maintain and modernise • Regulations such as PSD and open banking have played a major role in the emergence of fintech, levelling the playing field to boost innovation Vertically focused newcomers • With a back-end and brand optimised to focus on a limited number of products, newcomers have been able to amass market share very quickly and provide superior experiences, setting the benchmark for incumbents to meet today • Examples include Transferwise in the money transfer industry offering cheaper and easier to understand fee structures, trading platforms like Robinhood that have made it easier for novice investors to build their portfolios safely, or digital banks in Latin America that have reduced the barriers to entry for banking for much of the population Regulation has helped the vertically focused digital newcomers take market share Mobile app average rating Out of 5.0 4.72 4.48 4.78 3.72 2.72 Global mobile data traffic evolution Exabytes per month - 0.2 3.7 19.0 77.0 2000 2010 2015 2018 2022E New comers vs. incumbents Cash Cash Online trading Remittance Digital banking for teens Digital banking for the unbanked
  20. 20. White Star Capital 20 Sources: news, CB Insight, TechInAsia, Bain, ThePaypers (1) Aljazeera. (2) Statista. Share of online population who bought something online via mobile device in the past month as of Q3-2019. This compares to the following statistics: 69% (Thailand), 66% (Philippines), 38% (UK), 34% (Germany), 31% (France). (3) Challengers banks: fintechs whose first MVP is a checking or credit card account. As of Q4-2019. Wealthtech players yet to deliver • B2C robo advisors aimed to democratize wealth management through a low cost approach and standardised asset- allocation models, resorting to low-fee passive products. They however failed to take off due to the lack of clear value proposition perceived for customers • New players have understood the need for higher customisation and some players are adopting a B2B approach, partnering with relationship managers who remain crucial in the industry E-wallet and account aggregators are soaring, particularly in Asia • Asia saw the use of e-wallets flourish, quickly adopted by the underbanked and those that were heavily reliant on cash, driven by the rise of mobile penetration and government initiatives to transition into cashless societies • Adoption in the West has been slower due to the widespread use of debit cards, which are being leapfrogged in Asia Growth at all costs no longer working for neobanks • Due to the difficulty in monetising customers, neobanks initially focused on building large user pools, based on a "grow first, monetize later" philosophy • As these companies mature, they are now shifting their focus to profitability and healthier unit economics. This has come in the form of rebundling so as to benefit from CAC synergies and further user monetisation Wealthtech players have not proved their models yet, and growth at all costs is no longer sustainable for neobanks vs. 150 e-wallet licence holders in Asia1 80% Indonesia mobile e-commerce penetration2 39% USA mobile e-commerce penetration2 Total accounts added by challenger banks3 20 8 6.5 5 3.7 2.2 1.6 Sector Focus: Personal Finance B2C solutions B2B solutions Target banks, brokers, wealth managers, insurance companies Target consumers, experimented or not
  21. 21. White Star Capital Industry players are operating a rebundling of personal finance services 21 Gen Z Online brokerage DigitalBanking Freelancers Investment&Advisory Digital advisory Drivers: The emergence of the leading players was boosted by the rise of global payments and mobile technology, but brick-and-mortar agents like Western Union still dominate the market. Targeted users include both the unbanked (Remitly) and the banked (TransferWise) Diversification: There has been less rebundling so far than in other subsectors, as players focus on expanding services geographically. Some of them are developing a B2B offering (WorldRemit) Regulation: companies have either a fully-fledged banking licence (Starling and Monzo in the UK, the latter applying for one in the US) allowing for investment or lending services, or a less burdensome e-money institution status, similar to Revolut in the UK Diversification: Companies are expanding their product range, either developing in-house, or through a marketplace model, offering third-party services integrated into the platform. For example, Revolut provides lending services through a partnership with LendingWork while Monzo is doing so using its customer deposits. Starling is partnering with Wealthsimple, Habito, PensionBee and Kasko on various products. E-wallets Diversification: For example Toss (14m users) offers money transfer, credit score management, savings accounts or insurance, while Lydia (2m users) offers services such as switching internet or energy providers, and device insurance Disruption: Shifting towards improved trading technology, tools and user experiences. Stock trading was made accessible to novice investors through a frictionless experience with a quick onboarding process, commission-free trading and no account minimums Diversification: Companies are diversifying into crypto trading (Robinhood) or savings (Trade Republique), in the hopes of becoming a one-stop-shop for trading Business models: either B2C (Raisin) or B2B2C (Guideline) Diversification: Raisin, initially focused on savings management, and then expanded into pension and retirement through its acquisition of Fairr Savings & pensions Diversification: Some players have broadened their product range, offering, on top of investing advice and savings management, retirement savings advice or pay advances (Stash), while others still exclusively focus on investment management (Wealthsimple, Nutmeg) Debit cardFirst product Pay advance Brokerage Peer to peer Robo advisor MortgageCryptoSavings Consumer loan Insurance Travel Travel Digital banking Digital banking Digital advisory Digital advisory Brokerage Remittance Life, Auto Auto Remittance Sector Focus: Personal Finance Product offered Product announced Source: CB Insight, company websites, news press Payment Asset management Lending
  22. 22. White Star Capital Current trends and new challenges are opening the door for new opportunities 22 Financial education still a going concern • Fintechs have so far made their products accessible to a wide audience • However trusted financial advice is often only limited to the wealthier members of society Opportunity • We at WSC, believe that the fintech leaders of tomorrow will be those, not only providing easier access to financial services, but doing so in a responsible way, guiding users through their financial decisions throughout their life journey • The fintech leaders of tomorrow will be those who are able to provide customers with holistic financial wellness, taking a long-term approach, drastically improving lives as a partner of trust, beyond the mere financial product provided • This is particularly key as the millennial generation, whose level of financial literacy is notably low, will face the largest transfer of wealth in history Opportunity • Innovation in financial services has so far occurred where the shift in expectations and behaviour has been the fastest, i.e. 15 to 40 year olds • WSC sees tremendous opportunities for fintech players addressing the ignored segment of individuals coming up to retirement • Promising areas include supporting the elderly in need of additional sources of income, equity release products, annuity products, offering estate advice, tailored financial protection or financial advisory The unprepared new generation of retirees • Near and current retirees are in a more vulnerable position than previous generations, often with low savings and pensions • Their apprehensiveness towards technology will also prove to be an obstacle in helping this generation Sector Focus: Personal Finance
  23. 23. White Star CapitalWhite Star Capital Insurance
  24. 24. White Star CapitalWhite Star Capital Spreading risk amongst many 24 Source: Pitchbook, Scottish Widows, ActiveQuote Sector Focus: Insurance Insurance: An Introduction Insurtech has been one of the more recent trends in fintech over the last decade, with VC’s starting to see the opportunity in 2015 Deal value & volume The earliest forms of insurance begun with managing nautical risk. Merchants shipping their goods around the world, needed a way to protect themselves against the risks of losing or damaging the cargo or sinking the ship. Insurance then was structured similarly to an interest-bearing loan, in which the merchants took out a loan to fund the voyage. If the cargo was lost or damaged, the loan could be used as compensation, or if the ship sunk, the loan would not be repaid. The interest would cover the risk for the loan provider. As the world became increasingly more complex and advanced, insurance became available for a number of different types of risks beyond nautical. Most of these agreements were struck between independent underwriters, merchants and banks at coffee shops, up until the 1600s when Edward Lloyd developed a more structured setting for this, what we now call today the Lloyds of London marketplace. Around the world, more structured entities were forming to insure risk, namely Benjamin Franklin in the US launching The Philadelphia Contributionship in 1752 to offer fire insurance to Philadelphia citizens, Alpine Farmers agreeing to look after each other if their livestock or children became ill (the beginning of Zurich and Munich Re) and Scotsmen coming together during the Napoleonic Wars to secure provisions for widows, sisters and children to ensure they were looked after on the event of the death of their fathers, husbands or parents (the beginning of Scottish Widows, Scotland’s first mutual life insurer). The transfer of risk has been a major part of society from its very inception and has been governed by enormous financial institutions that have become outdated, technologically and socially. Consumers today know they need insurance, but would rather not to have to think about it. Therefore they require ease and convenience, provided by a transparent and trustworthy brand, and insurtech start-ups have been taking advantage of this fact to gain market share. $1,341m $1,454m $1,170m $2,772m $4,508m $474m $424m $842m $25m $167m $254m $514m $1,424m $1,580m $1,680m $3,238m $5,401m $555m 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America Europe Southeast Asia 24 7238 73 99 165 237 337 409 369
  25. 25. White Star Capital Distribution The late 2000s marked the beginning of the insurance revolution 25 Source: Insly Sector Focus: Insurance Particularly in Europe, most of the early innovation in the industry was at the distribution level, where typical broker channels were being replaced with comparison markets Policy- holder Insurer/ Carrier Re- insurer Customer (consumer or business) agrees to pay a fee (premium) to insurer in exchange for a financial guarantee for the risk in question, and becomes a policyholder Risk-baring territory Broker Carriers Key Parties • Broker: Intermediary that sells, solicits or negotiates insurance policies for customers on behalf of insurance providers • Insurer (Carrier): Financial institutions that build, sell and service insurance products to consumers and businesses • Managing General Agent (MGA): Intermediary that specialises in particular types of risk, but uses a carrier to provide the required capital reserves, licences or underwriting expertise to create insurance products • Traditional MGA: Type of MGA that only provides the expertise and understanding in the policy design process. The carrier will use this to design the policy (e.g. pricing) • Quasi-Carrier: Type of MGA that will use a carrier to provide the expertise, required regulatory capital reserves (capacity) and licences, in order for them to have complete control over the insurance experience without having to expend resources on establishing themselves as a risk-baring carrier • Reinsurer: Financial institutions that build, sell and service insurance products to insurers, enabling to increase their capacity to write more insurance products and generate more profit Insurance Ecosystem Overview Traditional MGAs and Quasi-Carriers Insurer agrees to cede a share of the written premium to a re-insurer in exchange for a financial guarantee for the risk in question With the help of a number of supporting software products, insurer uses MGA to develop insurance products in a market where they see an opportunity MGAs, QCs and carriers use brokers to distribute their products, in exchange for a commission or share of the premium Often, MGAs, QCs and carriers will completely bypass brokers and sell their products directly to customers Quasi- Carrier Traditional MGA Supporting software Most start-ups will launch as traditional MGAs, and then transition into quasi-carriers to increase their margins
  26. 26. White Star Capital Using their much deeper understanding the their customer base, start-ups are competing with insurers as MGAs 26 Source: Company websites, Forbes, TechCrunch, Pitchbook, CBInsights, Fortune Sector Focus: Insurance $1.3bn raised to date Selected InvestorsOscar (US) is an online tech-enabled health insurance network Oscar’s data operations built a doctor classification engine to ensure policyholders were referred to the exact doctor they need, which is not the case with incumbent health insurance providers $300m raised to date Selected Investors Lemonade (US) is a licensed carrier providing digital home insurance products to consumers Lemonade opted to become a licensed carrier first to have complete control over their entire experience from the very beginning $60m raised to date Selected Investors Using artificial intelligence, Shift (France) provides solutions for claims automation and to combat insurance fraud Using machine learning, Shift is improving the claims process for both insurers and consumers, with fraud detection and claims settlement rates far high than industry standards $250m raised to date Selected Investors Next Insurance is a one-stop shop for insurance products for SMEs Today, there are more start-ups and SMEs than ever before, the Next founders used their experience as serial entrepreneurs to develop products that properly cater to entrepreneurs $114m raised to date Selected Investors BIMA (UK) builds and sells microinsurance services for low- income consumers in developing countries BIMA’s success largely stems from its execution in a completely underserved market, in providing right-sized insurance products for the region it’s being sold in
  27. 27. White Star Capital 27 • Insurance is shifting away from a sole focus on operational efficiency as the key profit driver • Start-ups are winning by providing customers with relevant products, at the right moment in time, in a convenient, transparent and personalised manner • Developing these types of solutions. but with the understanding that protection is more than just about the financial benefit, but also about preventing the event from ever occurring is how companies like Lemonade are winning the hearts of customers today • Artificial intelligence has been a significant area of focus in insurance given its many use cases across the insurance value chain • In particular, improved sales processes through chatbots that can provide a more personalised experience, or improved claims processes for customers, with a greatly reduced risk of fraud for the insurers • Incumbents and start-ups alike have embraced artificial intelligence as one of the biggest drivers of efficiency (1) EY. (2) International Data Corporation. (3) Raconteur. (4) Willis Towers Watson. • The underlying fuel for insurance is data • In order to price better than a competitor, having better data on the customer being served is key. Providing a better customer experience through AI can only be achieved with enough data • Both incumbents and start-ups have recognsied, the criticality of data and the insurance industry has transformed into a battlefield, where telematics, connected devices and data are at the centre Sector Focus: Insurance Usage based insurance has so far generated the following benefits: Which should inevitably result in cheaper premiums for customers Shift from reactive, to proactive and personalised Harnessing AI across the value chain Data or die Wielding data and customer centricity are the key trends of insurance today 40% Reduction in claims costs1 40% Reduction in policy costs1 $78bn Spending on cognitive and AI systems by 20222 58% Of insurers are focusing AI implementation in customer experience3 68% of P&C insurers believe advanced data analytics will have a positive impact on their top line4 86% of P&C insurers believe advanced data analytics will have a positive impact on their bottom line4
  28. 28. White Star Capital Customer acquisition poses one of the biggest challenges to insurtechs at the moment 28 Sector Focus: Insurance Customer acquisition and retention • Despite the prevalence of insurance, customer acquisition remains one of the largest road blocks to scaling for insurtechs • Often this is driven by • A lack of perceived relevance • Lower brand loyalty in more price sensitive regions (e.g. UK, Germany) • A lack of trust compared to the established brands • As well as this, the insurance industry is widely known as having one of the lowest Net Promoter Scores (NPS) • This has a significant impact on the unit economics of insurtechs as average revenue per customer tends to be lower than in other sectors, and lifetimes are lower due to poor claims experiences driving reduced retention Opportunity • In a similar way to how direct-to-consumer (DTC) businesses carved their mark into the e-commerce landscape, through marketing, branding and building trust to cater to the modern consumer, insurtech companies should employ similar tactics • Insurtechs do have customer centricity at the heart of their operations, however they are still struggling to overcome this challenge, given the stronger inertia of the insurance stigma • WSC believes that insurtechs that can provide insurance products in contextualised environments will increase engagement and consumers abilities to assimilate with brands and improving unit economics. Examples include: • Non-insurance products that are extensions of their core product • Offering insurance indirectly, as part of a wholesome solution along other products or services • Distributing products as memberships, driving home the perception that you are a member of a community
  29. 29. White Star Capital WSC also sees other opportunities that will create value in the future 29 Sector Focus: Insurance Going down the stack • Insurtechs today are launching as distributers, then transitioning into MGAs • We expect that as these insurtechs, as they continue to scale and build their brands, will want to take the next step and become a carriers themselves, increasing margins and having more control over their offering • However becoming a carrier is far more of an arduous, expensive and complex process than becoming an MGA Opportunity • Similar to WeFox’s acquisition of One, and Metromile’s acquisition of Mosaic, WSC sees an opportunity for more flexible and innovative carriers to present themselves as acquisition opportunities for the large insurtechs with MGA models today, to allow them to make that leap to becoming a carrier New areas of risk • More risk categories are arising, and previously uninsurable risks are now more attractive to serve • However these ventures often are accompanied by a significant amount of education which is proving to be an obstacle for scaling Opportunity • WSC sees two opportunities stemming from this challenge • Insurtechs that are identifying new and growing markets of risk that are currently underserved means they will have the opportunity to set the rules of the playing field and build a brand quicker • Insurtechs that are using new methods to provide insurance to SMEs that revolutionise the insurance value chain, allowing them to cut costs or provide a better service in a sustainable way • Overcoming the education challenge will come from a meticulous focus on the accessibility, distribution and brand of the product
  30. 30. White Star CapitalWhite Star Capital Financing & Lending
  31. 31. White Star CapitalWhite Star Capital $2.1bn $1.4bn $2.0bn $3.6bn $7.3bn $5.2bn $5.8bn $8.4bn $11.7bn $1.8bn $1.3bn $1.8bn $1.7bn $3.1bn $2.5bn $4.0bn $1.3bn $0.8bn $2.7bn $2.1bn $2.9bn $4.9bn $9.2bn $6.9bn $9.1bn $11.4bn $16.5bn $3.3bn 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America Europe Southeast Asia 0.3 0.20.5 0.7 1.0 1.2 1.3 1.4 1.5 1.4 Enriched data and new ways to digest this information has opened up the door for innovative lending & financing solutions 31 Source: Pitchbook, press Sector Focus: Financing & Lending Financing & Lending: An Introduction Historically, lending has been one of the most funded fintech sectors Deal value & volume (k) Lending has been a critical part of civilisation for thousands of years, with the earliest examples found in ancient loan contracts outlining agreements in the agricultural communities in Mesopotamia where farmers would trade harvest or animals, with the promise of delivering more at a later point in the future. Formal lending, as we know it today, is believed to date back to Ancient Rome, where wealthy individuals or pawnbrokers would offer loans similar to payday loans, that were secured through items held as collateral. Even though the fundamentals of lending have remained fairly similar over the centuries, the funds lent has steadily increased and the underlying technology has advanced, contributing to much of the commercial and industrial growth we have seen globally. While established financial institutions have dominated the lending landscape for quite some time, providing financing to relatively low-risk borrowers, the 2000s saw the emergence of alternative lending and financing players, particularly after the global financial crisis, when the general public lost their trust in traditional lenders and as the latter faced tougher regulatory scrutiny, limiting lending. Lenders today are leveraging online platforms and innovative credit scoring methods to provide financing to consumers and businesses historically underserved by traditional banks, in a quick, cheap and efficient manner. Rather than through simply consumer deposits, many platforms today now source their capital using debt itself, or equity pools from both retail and institutional investors, as well as covering higher risk categories e.g. unsecured loans, or specific needs such as working capital financing, students loans. # Deal volume (k)
  32. 32. White Star Capital Security Analytics Compliance The emergence of alternative lending occurred in the early 2010s following the global financial crisis 32 Source: Press, FT Partners, Morgan Stanley, Bank of America Merrill Lynch (1) includes banks, insurers and asset managers. (2) Merchant Cash Advance. Alternative lending platforms have simplified and made access to capital for all types of businesses and consumers far more transparent Ecosystem Balance sheet lenders Underwrite own loans Fill in paperwork Provide loans, charges origination fee (driven by merchants or consumers) Capture spread Provide Capital Institutional1, Hedge Funds, VC Asset-light lenders Act as brokers Security, analytics & compliance players Lending platforms Institutional, public bodies, supranational, Retail Allocate loans Provide Capital, pay servicing fee Consumers & Businesses Fund providers Debt collectors Home improvement Education Invoice financing Real estate Marketing spend Bring business Pay fee Distribution partners Indicate best lending option Key Parties in the ecosystem • Borrowers: Consumer or business in search of capital, to financing something, that they will pay back • Loan investors: Investors looking for yield-generating investments, providing equity or debt • Lending platform: Online platforms monetising mostly through fees charged on loan origination and servicing Borrowers Verticalized lending players Fill in paperwork, pay origination fee to lending platform Provide information for profile analysis Provide regulatory check Sector Focus: Financing & Lending
  33. 33. White Star Capital $1.1bn raised to date Selected Investors Klarna (Sweden) provides an online payment platform facilitating payments through instalments Klarna increased merchant conversion rates, allowing them to provide affordable financing options at time of sale, which was far more convenient then any other form of financing These start-ups have democratised access to capital for consumers and businesses over the last decade 33 Source: Company websites, press, Pitchbook Note: total raised include both equity and debt financing. $4.3bn raised to date Selected Investors $2.4bn raised to date Selected Investors $400m raised to date Selected Investors C2FO (US) is a working capital marketplace for vendors and buyers C2F0 solved fluctuating cashflow issues, by changing the buyer/supplier relationship, allowing suppliers to get paid earlier, while providing buyers with a discount $990m raised to date Selected Investors Kabbage (US) provides funding to SMBs through automated business loans Founded in the wake of the crisis, Kabbage upended lending with a strong focus on data reducing defaults, and offering extremely fast loans vs. incumbents Opendoor (US) provides an online real estate marketplace aiming to simplify home buying and selling Opendoor pioneered the ibuying concept, bypassing intermediaries to reduce the time wasted and the significant fees that come with the traditional homebuying process Sofi (US) provides an online consumer finance platform SoFi initially launched as a student financing platform, providing accessible and affordable funding to help young Americans fund their education Sector Focus: Financing & Lending
  34. 34. White Star Capital 34 Sources: Pitchbook, press articles, news, Financial Times, Forbes (1) As of 31-Mar-2020. Sector Focus: Financing & Lending Focus on credit decisioning • Part of the promise of alternative lenders resides in the ability to conduct enhanced analysis on enriched data, in order to better assess the risk profiles of prospective borrower that were historically overlooked by traditional banks. Earliest initiatives tackled unsecured consumer loans and SMBs financing needs • New models aim to provide an edge vs. traditional institutions through technology e.g. with AI, machine learning and/or predictive modelling, as well as improved methods of data digestion in risk scoring algorithms • Such innovative credit models aim to increase credit acceptance without increasing credit risk Room for improvement indicated by the largest players • New credit scoring methods remain to be proven. Although underwriting methods are improving, the largest alternative lenders are still loss making (Lending Club, Funding Circle), or have thin margins (OnDeck, Greensky) • The sector has also suffered from reputational scandals regarding questionable lending practices (Lending Club, SoFi) • This challenge comes along with expensive customer acquisition, as well as costly funding, vs. banks that benefit from low-cost deposits Many new lenders have focused on credit decisioning. However, recent poor performance of large new lenders shows there is room for improvement Ad metricsPayment transaction Unsecured consumer loans SMBs financing needs Enriched data includes: Live bank feedsMarket insights Share price decrease since IPO1 (95)% (78)% (95)%(87)% Early initiatives in:
  35. 35. White Star Capital 35 Sector Focus: Financing & Lending A favourable market environment • The GFC led to a low yield environment, driven by low central bank interest rates, slow economic growth and low inflation expectations • This made alternative lenders, in search of funding, attractive to investors looking for high-yield generating investments • As we enter a tougher era post the COVID- 19 crisis, players might be put under pressure as risk models are truly put to the test Supportive regulation • Open banking is opening up bank data to non-bank players, who can thus leverage technology to provide advanced, frictionless and better tailored products to customers • The lighter restrictions applying to non- bank lenders, such as low capital requirements, allow for a smooth and quick go to market strategy, compared to established financial institutions Growing competition on the battlefield • Established banks, now launching new alternative lending solutions • Large multinational tech companies, broadening their product offering, pushing lending and financing solutions to their customer base • Challenger banks, expanding into the lending field New lenders have benefited from a favourable market environment, as well as advantageous regulation, which has led to intense competition New tech entrants Sources: news, companies’ press releases, tradingeconomics.com (1) American Federal Reserve Systems. (2) European Central Bank. (3) Revised Payment Services Directive. 0.0%-2.4% US FED1 interest rate over 2010-20 0.0%-1.5% ECB2 interest rate over 2010-20 Low interest rates Slow growth 1.5%-3.0% US GDP growth over 2010-20 (0.5)%-3.0% US GDP growth over 2010-20 Dodd-Frank Act & Basel III • Put banks under scrutiny • Imposed capital reserves • Set underwriting requirements • Reduced banks’ answers to loan requests PSD23 • Pushed for more data transparency • Broke down banks’ monopoly on their user’s data • Allowed third-parties to retrieve users’ account data
  36. 36. White Star Capital New challenges are opening the door to new opportunities 36 (1) CAGR of the gross volume of the global gig economy. Sector Focus: Financing & Lending Competition is heating up • The 4 main differentiation levers that lenders can play with includes their access to capital from fund providers, credit decisioning, customer acquisition, and the customer experience they offer • Many of these levers are reaching the point of diminishing returns, for example access to capital is no longer as much of an obstacle as it once was, and with this, the lending market is slowly showing signs of commoditisation Opportunity • By targeting a niche market and answering very specific user needs, new lenders will have the opportunity to become the #1 reference in the field and thus benefit from increased visibility, better value perception and easier access to distribution channels • A recent example is Greensky in the home improvement industry. Players have also tackled areas such as invoice financing or marketing spend • We, at WSC, believe that emerging underserved customer segments still represent a tremendous opportunity for new lenders. An example is the gig- economy, expected to grow at a 17.4% CAGR over 2018-231 and which includes 162m workers across the US and Europe, or the nascent pool of SMBs in Asia, that increasingly require financing Opportunity • We believe that the future leaders in lending will be those operating a rebundling of the financial services they offer: broadening their product range for a specific customer segment or use case. • The current market is becoming increasingly fragmented with an abundance of financial applications and platforms, across all fintech sub-sectors • As such, becoming a one-stop- shop for specific users – offering financing, debt collection, admin support and cash management in one place for example, has the potential to lead to a highly virtuous circle: increased stickiness leading to improved data collection, allowing for enhanced tailored recommendations on new financial products, leading to further increased engagement
  37. 37. White Star CapitalWhite Star Capital Business Operation Tools
  38. 38. White Star CapitalWhite Star Capital Business operation tools’ main competitor remains the spreadsheet 38 Source: Pitchbook, Mobiletransaction.org, theFintechtimes (1) OECD. (2) IDC, VirginMedia. (3)In an effort to be conservative with the funding rounds included in this data, the following keywords were used on Pitchbook: payroll software, b2b banking, business banking, expense management software and accounting software. Therefore this may not be a complete view of the funding landscape. Sector Focus: Business Operation Tools Business Tools: An Introduction Funding for Business Tools has begun to pick up in Europe, and we expect to see the same trend in SEA in the coming years Deal value & volume3 Big corporates have the resources to build their business operation tools internally, or are big enough to provide enough custom to make developing solutions for them an attractive opportunity. Outside of this, SMEs have simply had to make-do with either pen and paper, spreadsheets or the solutions that were designed for bigger businesses, that may be too complex or not necessarily suit their specific needs. SMEs have however always accounted for the largest share of businesses globally, reaching around 99% today1. In 2017, the IDC also found that these businesses share exactly the same strategic imperatives that large corporates do, i.e. the power that having the most up to date technology can provide, in particular from a competition perspective2. These two points highlight how large the SME opportunity is for business tools. However until recently, it has been largely untapped for two main reasons, SMEs being held back by a lack of knowledge and willingness to get comfortable with the new, and the naturally fragmented SME customer pool, which has resulted in scaling any business providing these services difficult. With the mass onset of cloud services, digital marketing, millennial thinking and demands, SMEs are becoming an increasingly attractive market to serve as innovative entrepreneurs crack the ability to scale these businesses, and business owners themselves get comfortable with technology $122m $250m $206m $503m $520m $367m $779m $1,558m $1,579m $192m $232m $203m $324m $1,286m $280m$142m $482m $219m $526m $563m $572m $955m $1,889m $2,877m $471m 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America Europe Southeast Asia 37 3953 79 102 126 159 183 161 158
  39. 39. White Star Capital These start-ups have brought small businesses into the future with their innovative but simple platforms 39 Source: Company websites, Techcrunch Pitchbook $316m raised to date Selected Investors Gusto (US) is a payroll and benefits platform, allowing firms to provide benefits like health insurance and 401(k) plans Gusto’s simple and cross-platform friendly solution to digitising and automating payroll and partnering with accountants to go-to market allowed the business to reach unicorn status in 4 years $230m raised to date Selected Investors Brex (US) is a corporate credit card provider for start-ups Corporate expenses have long since been difficult for start-ups to manage, as incumbent providers often overlooked this market. With no personal guarantees or deposits necessary, Brex quickly became a favoured business tool for start-ups $128m raised to date Selected Investors Qonto (France) is a business neobank providing financial services for SMEs With its simple sign-up process, modern interface and easy accounting service integrations, Qonto has simplified the process of opening a business bank account considerably $866m raised to date Selected InvestorsAvidXchange (US) is an accounts payable automation and payment processing platform for middle-market businesses In an environment where the majority of businesses pay bills manually and offline, AvidXchange has brought invoicing into the digital age $482m raised to date Selected InvestorsCarta (US) helps private company investors, founders and employees manage their equity and ownership Initially a digital platform for start-ups to manage capitalisation, Carta’s continuous rollout of solutions to aid start-up stakeholders led the company to become a leader in this space Sector Focus: Business Operation Tools
  40. 40. White Star Capital 40 • SMEs often do not have deep technical resources such as developers and software engineers in-house to automate operations • Many of the tools that have garnered success today have been built with UIs that are easy to understand and use, and sold at an affordable price point • Many of these non-technical business owners now use software that employs RPAs and APIs to support their businesses, something which was often only available exclusively to developers • Millennial business owners and employees are demanding just as much from their relevant firm’s financial operations, as they do from their own financial operations • Millennials do not see why their account payables and payrolls cannot be automated, or why opening a business account cannot be as simple as opening a personal bank account has now become Source: (1) Mckinsey. (2) Euractiv. (3) Smallbusiness.co.uk. (4) Techcrunch. (5) Accounting today. (6) Xero. • Start-ups focused in the accounting services space have gained the most traction in automating simple but very time consuming tasks e.g. bookkeeping and expense claims • This has forced accountants to broaden their service offering, develop their technological understanding and add value today, not just as financial advisors, but as a strategic business advisor Sector Focus: Business Operation Tools Simplicity and self-service at the forefront Rising expectations Changing role of accountants as more and more tasks are automated Only 25% of smaller businesses are automated, but this is changing1 £8.7bn is lost by UK SMEs managing company expenses3 61% Share of businesses satisfied with the breadth of services their accountant offers6 60% of US businesses that still manage accounts payables offline4 89% Share of businesses that see their accountant as a trusted advisor5 70% Share of businesses that do not work with an accountant due to costs5 It is expected that if 30% of SMEs adopted modern and advanced IT tools, SMEs combined revenues could increase by €570bn2
  41. 41. White Star Capital There are too many solutions for SMEs to choose from 41 (1) Xero. It’s a jungle out there • Given the rise in popularity and interest in this space, there is now an abundance of solutions for payroll management, accounting, business banking etc. • SMEs use on average between 40 and 99 different apps to run their businesses • This has created a jungle that has been difficult to manoeuvre for the business owner Opportunity • Business owners want to innovate, and they want to have technologically advanced operations ensuring the efficiency of their businesses, but they want this with as little effort as possible • These solutions themselves may be simple to use, but using a number of different solutions and being able to integrate them can become complex • WSC sees an opportunity for fintech businesses to debunk this jungle, create a one-stop shop for business operation back-end, providing all the necessary services required to run a business but with a simple to use UI Sector Focus: Business Operation Tools
  42. 42. White Star CapitalWhite Star Capital Payments
  43. 43. White Star CapitalWhite Star Capital The trading of value is one of the most important aspects of civilisation. As it has become more complex and global, so too has the ability to pay 43 Source: Pitchbook, Mobiletransaction.org, theFintechtimes Sector Focus: Payments Payments: An Introduction Since the first payment card in 1950, North America has been a leader in payments innovation, and has continued to hold this position consistently accounting for 70%+ of payments funding Deal value & volume The beginning of the electronic payments revolution dates back to the 1950’s with the introduction of the first payment card, a cardboard card issued by Diners Club in the US, with the intent of providing merchants with a standardised way to settle transactions with their own bank and their customer’s bank, without the use of cash. Following this, innovators like American Express, Barclays and IBM played major roles in the introduction of the plastic card, the first analogue card machine, the magstripe and the chip and pin concept. However it was not until 1979, when Visa introduced the first electronic card machine terminal and the card network as we know it today, that card payments took off globally. By the late 1990’s, electronic payments were a norm and the internet became widely accessible for consumers, marking the beginning of the e-commerce revolution. Virtual payment terminals and other new and innovative ways to offer online payment services from companies like PayPal and Authorize.net were the key drivers behind the rise of Amazon, Ebay and e-commerce as a whole. As commerce has evolved, consumers’ needs for speed and convenience has risen, in turn forcing merchants’ to provide goods and services underpinned by these aspects (including the ability to accept all payment methods globally and from various card networks) at a fair price. $632m $681m $576m $1,554m $1,403m $1,290m $1,887m $2,307m $3,529m $1,440m $485m $267m $541m $516m $1,124m $316m $712m $825m $870m $2,065m $1,739m $1,593m $2,496m $2,978m $4,740m $1,803m 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America Europe Southeast Asia 184 90224 329 444 489 486 543 540 490
  44. 44. White Star Capital Online PoS/gateway Offline PoS/checkout tools A simple card transaction involves several parties that have all experienced a significant amount of innovation in the last 2 decades 44 Source: Adyen, FintechWeekly, BlueSnap, Deloitte (1) Merchant Maverick provides a great overview of how these fees work (https://www.merchantmaverick.com/the-complete-guide-to-credit-card- processing-rates-and-fees/). Sector Focus: Payments These parties will often manage one or more of the processes in a card transaction, particularly as competition has increased and M&A moves to the top of these companies’ agendas Customer Merchant Acquiring Bank Merchant Acquiring Bank Issuing Bank Customer pays at checkout (online or offline) using card or mobile. Payment gateway will connect the checkout with processing network and begin the transaction Payment information is transmitted to the acquiring bank through the payment gateway Payment outcome is transmitted to terminal and if successful, the acquiring bank will extend a line of credit to the merchant that the issuing bank will repay Acquiring bank uses the card network and payment information to request funds from issuing bank Issuing bank decides whether to accept or reject request, sending this decision back through the card network to the acquiring bank Customer acknowledges outcome Payment processing network Customer payment methods Card networks/schemes Payment processors Issuing banks Acquiring banks Key Parties • Acquiring bank: Financial institution that underwrites and often processes and settles card transactions • Payment processor: Entity that facilitates communication between the merchant, and acquiring bank and issuing bank • Card network: Used by the payment processor or acquiring bank to communicate with the issuing bank • Issuing bank: Customer’s bank These parties generate revenue through charging fees, which vary widely based on the transaction type, industry, sale amount, card type1 Card transaction overview
  45. 45. White Star Capital These leading start-ups have played major roles in improving payments for consumers and businesses 45 Source: Company websites, Pitchbook Sector Focus: Payments $1.3bn raised to date Selected InvestorsStripe (US) provides a number of online payment services for merchants that simplifies the process of taking payments online Stripe was one of the first to market with its easily accessible API which simplified online payments for businesses $376m raised to date Selected Investors Marqeta (US) partners with issuers, providing processing services that gives card issuers total control over card usage Unlike acquirer processors (e.g. Adyen), Marqeta manages issuer processing, enabling businesses and consumers to make payments with the world’s first issuer processing open API $128m raised to date Selected InvestorsGoCardless is an online direct debt provider, that offers services to enable merchants to take direct debit payments Before GoCardless, offering direct debit services, although attractive to consumers, was a very cumbersome for businesses $230m raised to date Selected InvestorsUsing one integration, Checkout.com (UK) enables merchants to take payments from around the world Checkout.com differentiates through its API, that offers in-country acquiring and feature parity across markets and currencies $187m raised to date Selected InvestorsYapstone (US) provides payment services to marketplace businesses to enable them to take payments Yapstone competes with companies like Stripe and PayPal by offering payments solutions specific to marketplace businesses
  46. 46. White Star Capital 46 • Millennials and Gen-Z command a significant share of global consumer spending power and continue to demand more convenience, more ease, more transparency and more control over paying for goods and services • Millennials have been a key pushing force in the adoption and rapidly growing penetration of mobile payments • Sustained growth in e-commerce has continued to drive growth in the payments sector and will continue to do so as millennials and Gen-Z, who prefer e-commerce channels, continue to increase their share of global spending power • Unfortunately this comes along with increased security risks, as cyber attackers continue to innovate and grow Source: Mckinsey, PaySafe (1) Mckinsey. (2) PaySafe. (3) Digitalcommerce360 (4) Juniper Research. (5) Statista. (6) SmartInsights. • Today, the ratio of time spent mobile shopping to money spent is 4:15, a large proportion of transactions are started on mobile devices, but completed on desktops • However this is beginning to change as the mobile experience improves and gains parity with desktops Sector Focus: Payments Changing consumer behaviours E-Commerce penetration continues Mobile penetration beginning to deepen Millennials and Gen-Z demands are changing the payment landscape as we know it… $350bn Spending power of Millennials and Gen-Z in US1 40% Share of global consumers Gen-Z accounts for in 20201 53% Share of Gen-Z consumers that prefer contactless payments2 +14% Global CNP fraud growth by 20234 +18% 2019 global e-commerce sales growth3 1.0 1.4 1.8 2.3 2.9 3.6 52% 59% 64% 67% 70% 73% 2016 2017 2018 2019 2020 2021 Global Mobile E-Commerce Sales Sales ($trn) Penetration 5 +40% 2016-18 growth in global e- commerce penetration3
  47. 47. White Star Capital 47 • More and more technology companies are entering the world of fintech in order to stay relevant and offer their customers a more complete experience • Following in the footsteps of SuperApps in Asia such as WeChat, Go-Jek and Line, tech giants in the west are applying this approach and entering the payments landscape • Due to less stringent data regulations, API usage has become the norm in Asia, and are becoming central to financial services in Europe and the US, whether for incumbents, start-ups or merchants, driven by the need for greater convenience and simplicity for end users • APIs alleviate pain points from complex and custom integrations and help to develop unified global solutions • As the payments sector grows, new regulations and reforms are being introduced to protect end customers • Overall, data is paramount, and the more that businesses can understand about their customers, the better their advantages are against the competition • Regulators understand the importance of ensuring that consumers do not take the brunt in the race to be the best Sector Focus: Payments Examples of tech players launching payment solutons Leading start-ups with APIs at their forefront Key payment related regulations Evolving Competition APIs are becoming critical to payment operations Regulators are keeping up the chase …creating opportunities that are attracting new competitors to enter the race and forcing major regulatory changes 6 PSD2 EU Payment Services Directive PCI DSS Payment Card Industry Data Security Standard GDPR General Data Protection Regulation 3DS 2.0 3D Secure 2.0
  48. 48. White Star Capital However there still exists a number of challenges that will present opportunities to create significant value 48 (1) Digitalcommerce360.com. (2) Please see here for a great overview of 3D Secure 2.0 (https://www.adyen.com/blog/3d-secure-20-a-new-authentication-solution) Commoditisation • Staying differentiated is becoming increasingly difficult for incumbents and start-ups alike as the market becomes more crowded and processing speed, convenience, security and capabilities become commoditised attributes, eating away at PSPs’ margins • Interchange fee caps in Europe and USA are also squeezing margins of PSPs, and this trend may spread to Asia too Complex Payment Stacks • On average, businesses will have 5 processors and 4 merchant acquirers1 • Merchants now believe there are too many options on the market, and they themselves are currently using too many payment services to ensure they can stay relevant and can offer the best checkout and payment experience possible to their customers • As a result, payment stacks are becoming far too complex Opportunity • PSPs need to understand exactly what consumers want today: • Do consumers want the freedom to purchase what they want, when they want, through a marketplace type system? • Do consumers want to be able to conduct the entire buying experience in a closed ecosystem? • WSC believes emerging PSPs must find the answer to this question and focus their product development on facilitating this, as this will be the key driver behind gaining market share with merchants • As well as this, emerging PSPs must employ similar tactics to the tech giants and look for more revenue opportunities outside of payments, but that will help to drive payment volumes e.g. supply chain financing, cash management, invoicing Opportunity • This challenge will continue as relying on one or two PSPs poses a significant risk for merchants, given the lack of global unification of payment services • With the introduction of 3D Secure 2.02 in 2020, these risks will only intensify • As with any crowded and commoditised market, there is always an opportunity to aggregate • WSC is keen to see start-ups that have a focus on simplifying the payment stack through • Using services similar to real- time switching solutions in the utilities and insurance markets today • Introducing a middle-layer that allows merchants to pick and choose payment methods, customise payment workflows and have complete control over their transaction information in a simple and intuitive way
  49. 49. White Star CapitalWhite Star Capital Fintech-as-a-Service
  50. 50. White Star CapitalWhite Star Capital Fee-free digital credit card (Launched 2019) by Back-end commoditisation has led to buying time to market becoming the preferred option 50 (1) Failory. (2) CNBC. Sector Focus: Fintech-as-a-Service Fintech-as-a-Service (FaaS): An Introduction 42% of banks are engaged with joint partnerships with fintech companies2 The technology landscape is more alive today than it ever has been. 137,000 start-ups are founded a day1, and this number has been accelerating since the 1990’s with the rise in popularity of the internet, digital marketing and the increasing comfort with transacting online. Be it a start-up or a tech-giant like Google or Apple, competition is at an all time high, and the need for differentiation is forcing companies to enter new and often adjacent sectors and products, a trend that has been mentioned in this report on numerous occasions. The more a business understands its customer, the more likely they are to serve them better, no matter the business, and one of the most intimate aspects of a customer a business can have visibility on is their finances. Due to this, tech-giants are encroaching into this space, to create additional revenue streams and cross- selling opportunities through understanding exactly how their customers manages their money. As well as this, of 137,000 start-ups founded today, a number of these are fintech start-ups hoping to provide better financial service experiences, but do not have the resources to build the required infrastructure which has largely become commoditised. These two trends have opened up a new sector within the infrastructure landscape of fintech called Fintech-as- a-Service (FaaS). FaaS businesses are providing the entire back-end infrastructure for non-financial and fintech start-ups to develop financial products and provide embedded financial services through APIs, often without the need to be regulated as a financial institution. We believe this will be a critical area for the entire technology ecosystem as fintech innovation continues, and more companies begin to generate revenue directly from financial services Seamless and secure way to pay on Facebook apps (Limited launch in select locations) by Financial suite of products, for Uber drivers including real-time earnings, current accounts and credit cards (Coming soon) by Checking account offered by Google accessed through Google Pay (Coming Soon) Selected tech-giants working with financial institutions to deploy their own services Selected fintechs working with FaaS providers
  51. 51. White Star Capital So far FaaS has had an acute focus on banking and lending solutions 51 Source: Press, Railsbank Sector Focus: Fintech-as-a-Service Each of the areas in the tech stack require numerous integrations with different systems and data types, both old and new, as well as each of the other areas, quickly proving the difficultly of building from scratch There are usually 6 key areas that a Financial Services tech stack must cover to be successful FS Stack Fraud management Regulatory adherence Data management Payment facilitation Core systems Licence FaaS Workflow Customer Fintech or tech company Financial Service Wallets Current accounts Credit cards Insurance Financing Ledgers Money transfer Payments FX services Services provided through an API connection User interface developed by FaaS client Regulatory Adherence • Every single financial product abides by a particular set of regulations to protect the customer • Ignoring these guidelines, or simply not being ignorant of them can result in fines Licences • For a number of financial products, throughout most regions, entities would need licences to offer them • This can often be a long, expensive and arduous process Core Systems • This area essentially refers to the storage directory for the product that logs, holds and tracks all information moving through the system Payment Facilitation • For any financial service, the ability to move money is critical, whether it is a cash withdrawal, a payment, claims payout • Difficulty in building this out stems from the necessary relationships required with financial institutions globally Data Management • Particularly through initiatives like PSD2, finding, funnelling and structuring the data necessary to service your customer will be a critical aspect of the product Fraud Management • The customer’s money being handled must be protected at all costs • The evolving nature of financial fraud means this can be difficult to keep up with consistently
  52. 52. White Star Capital These start-ups are enabling some of the largest financial institutions and neobanks globally 52 Source: Company websites, Pitchbook Sector Focus: Fintech-as-a-Service $187mraised to date Selected Investors Deposit Solutions (Germany) is an open banking platform providing deposit management services for financial insitutions Deposit Solutions changed the savings industry by allowing banks to offer a number of 3rd party savings solutions without having to set up new accounts $111m raised to date Selected Investors SolarisBank (Germany) enables both bank and non-bank businesses to build and offer their own financial services through its API integration SolarisBank holds a full banking licence and passporting rights across all EU regions $106m raised to date Selected Investors Thought Machine (UK), with core banking system Vault, works with banks to reimagine new and legacy platforms Thought Machine’s solution is completely cloud-native, providing customers with more flexible, efficient and cheaper to maintain back-ends $45m raised to date Selected InvestorsMambu (Germany) is a platform for banking and lending businesses that already have the required financial licences Similar to Thought Machine, Mambu’s solution is also truly cloud native providing similar advantages
  53. 53. White Star Capital There is a huge opportunity for FaaS for insurance too 53 Sector Focus: Fintech-as-a-Service Deploying insurance is difficult too • The Insurance sector is experiencing similar trends to banking and payments, with digital offerings at the forefront of new start-ups and traditional institutions agendas • Insurtech start-ups today still rely heavily on incumbent insurers as explain in the Insurance section of this report • As well as this, many tech-giants are also seeing the benefits of being able to offer insurance solutions to their customers, noticing that the trust consumers have in their brands can go a long way in creating value • However taking advantage of this opportunity in many ways can be even more difficult than its adjacent sub-sectors Opportunity • Start-ups currently providing cloud-native insurance specific infrastructure services, covering all areas of the insurance workflow from licencing and regulatory consistency across regions, to distribution readiness will create a significant amount of value for insurtechs and incumbents looking to reimagine insurance
  54. 54. White Star CapitalWhite Star Capital Regtech
  55. 55. White Star CapitalWhite Star Capital Evolving regulation and growing cyber risk have made Regtech tools a priority for financial services providers 55 Source: Pitchbook (1) Know Your Customer, Anti-Money Laundering, General Data Protection Regulation. (2) Juniper Research. Sector Focus: Regtech Regtech: An Introduction Regtech has seen an increased focus from investors, with Europe in particular picking up speed Regulation technology, or Regtech, refers to solutions relating to regulatory requirements on companies across 1) data security and transaction monitoring to detect fraud or financial crimes; 2) identity verification and KYC1 and 3) regulatory affairs focusing on rules compliance. The Regtech boom has its roots in the aftermath of the Global Financial Crisis, with regulators increasingly imposing stricter guidelines on financial institutions, enacting numerous rules related to consumer protection, compliance, fraud detection (AML1) and data privacy (GDPR1). In addition to this, the emergence of new fintech models has contributed to further complications of the regulatory landscape, pushing regulators to act in a more agile and preventative manner on new topics such as data transparency and open banking. Data security and transaction monitoring have also become of utmost importance for financial services, as they go increasingly software-driven: the resort to the web, the cloud, mobile applications or the internet of things, aimed to offer increasingly smoother customer experiences and quicker services, has broadened the attack surface from cyber threats. The space has seen the emergence of a plethora of players, as financial services companies lack the expertise, the people, the time, the money or the agility to build solid solutions internally, and is as topical as ever, as spending on Regtech platforms are expected to increase to $115bn by 2023, compared to $18bn in 20182. Deal value & volume $141m $170m $371m $264m $452m $764m $802m $1,267m $272m $110m $146m $95m $211m $306m $617m $120m $107m $175m $204m $487m $414m $550m $992m $1,166m $1,971m $392m 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 North America Europe Southeast Asia 50 3961 80 121 125 173 243 231 208
  56. 56. White Star Capital As the economy becomes increasingly software- driven, with data volumes soaring, Regtech solutions become crucial 56 Source: Companies websites, news run, TechCrunch (1) General Data Protection Regulation, and California Consumer Privacy Act. Sector Focus: Regtech There are 3 key factors that have driven this Privacy Risk management Fraud networks Account takeover Data security & transaction monitoring Regulatory affairs Lifecycle management Background check Tax-related matters Compliance Financial institutions & fintech Customer Identity verification & KYC Subscriber info Device info Location data Network activity Create account, get onboarded, use services through a device More frequent, diversified and sophisticated cyber threats • The number of cyber attacks has been rapidly growing, and increasing their likely entrance points, from networks, to applications to transactions, messaging or the cloud • The impact on businesses can be two-fold. 1) Reputationally, companies that have suffered a data privacy breach might face a loss of trust from customers and consequently increased churn, 2) Business wise, some attacks might be paralysing, reducing a businesses’ ability to actually operate Liberating financial services in an increasingly digitalised economy • The economy is becoming increasingly digitalised, through the shift to online by established financial institutions, the spread of digital-native fintechs, the democratisation of crypto platforms and more broadly, the growing shared-economy platforms that are connecting more and more people together • Virtual identity verification, regulatory and security tools have thus become crucial for financial services providers, both for recruitment purposes and employee / customer management Quickly evolving regulation and government support • Companies must adapt to the continually changing regulatory environment, recently reshaped through privacy laws such as GDPR and CCPA1, or PSD2, MiDIF II, Basel III, and Brexit • Building the expertise and deploying resources internally can be costly and time- consuming, hence the growing importance of specific providers in the space • Governments actions contributes to this growth, such as the development of sandbox programmes in the UK and other European countries so as to boost experimentations Resort to Regtech solutions Collect, store and analyse customer actions Regtech players provide companies with the expertise to navigate the evolving cyber landscape Online fraud payment
  57. 57. White Star Capital These start-ups are supporting some of the largest financial institutions and fintechs globally 57 Source: Company websites, Pitchbook Sector Focus: Regtech $310m raised to date Selected Investors Checkr (US) provides a background checks platform Through its API-first approach, Checkr simplifies the archaic and manual way businesses run background checks. The solution provides access to numerous verification sources and can be plugged into clients’ on-boarding and HR workflows $282m raised to date Selected Investors Fenergo (Ireland) offers a regulatory software helping manage client onboarding and lifecycle management requirements Fenergo simplifies the way large financial institutions navigate the digital era, helping with regulatory requirements, rolling out digital interfaces and providing internal-facing services $270m raised to date Selected Investors Onfido (UK) offers businesses a verification platform intended to automate the identity verification process Using AI based technology, Onfido helps to fight personal identity fraud providing faster, safer and cheaper methods to identify and verify users $100m raised to date Selected Investors Shift Technology (France) offers fraud detection and claim automation Shift helps insurance players reduce fraud through its AI- powered detection models that automates claim reviews, which to date has been a very manual process
  58. 58. White Star Capital Empowering consumers to control their data and proper information oversight in a collaborative world 58 (1) Deloitte. Sector Focus: Regtech Security in a complex and ever-changing world • Companies are struggling to cope with the ever evolving regulatory landscape • Failure to stay on top of this has resulted in over $350bn worth of fines over the past decade1 • This is specifically true with privacy- related regulations • As well as this, customers have little control and visibility over the data they share and how it is collected, stored and kept safe Opportunity • New players have tried to address the issue through a B2B approach, helping companies navigate the changing regulations, while far fewer have adopted a consumer-focused perspective • We believe there is a massive opportunity for companies aiming to empower consumers to control their data, whether it is related to their actions such as sign-ups, downloads or purchases, allowed permissions, banking details or other personal information Information oversight in collaborative environments • Regulators require strict communication oversight in well established financial institutions, such as trading floors or investment banking departments • With the emergence of Unified Communications as a Service (UCaaS), companies will likely move away from standard messaging apps and diversify into broader collaboration tools Opportunity • We see lots of potential in start-ups focusing on helping companies supervise the flow of information shared through new channels, such as files transfers, conference calls or video sessions • Much has happened around standard communication channels such as emails or direct messages • RegTech leaders will need to develop adequate technology to help financial institutions capture data and provide appropriate compliance support, in line with regulations
  59. 59. White Star CapitalWhite Star Capital Global Outlook 59
  60. 60. White Star Capital Defining trends in US include complex regulatory landscapes and the shift towards cashless society 60 (1) Telegraph. (2) Yahoo Finance. (3) Raconteur. Global Outlook • Depending on the fintech firm’s activities and the State they operate in, the firm may be subject to a number of federal and state regulators (e.g. there are 7 federal regulators in the US) • As well as this, there is limited governmental support and collaboration compared to Europe and Asia to help burgeon the fintech sector • This has created a number of barriers of entry, and hinderances to growth within the US • Special charters for fintech firms to operate solely under federal law have been investigated but there has been limited headway in this regard, and will remain a critical theme underlying fintech progression in the US State and federal level regulation is proving to be confusing and an obstacle to growth Non-cash payments represent 45% of all payments in the US1 • Cash continues to be the most frequent method of payment in the US, despite the unprecedented growth of e-commerce and players like Venmo and Square that have played a major role in the shift to non-cash payment methods • This is in contrast to other leading countries around the world • However there are a number of signs that this is changing, as 50% of US consumers now report carrying cash less than half of the time2 • As demographics shift, given the younger population, we expect non-cash payments to increase significantly Proportion of non-cash payments3 USA: 45% Singa- pore: 61% Sweden: 59% Nether- lands: 60% France: 59% UK: 52% Canada: 57%
  61. 61. White Star Capital 61 Source: News press. (1) Forex Business as of 2015. Global Outlook • Credit cards are the most popular form of non-cash payment methods in North America, compared to Europe given the differing views of credit, particularly after the global financial crisis • North Americans are more comfortable with the concept of credit, understanding the potential benefits of increased purchasing power, rewards, benefits and consumer protection compared to using debit cards • Due to this, it is evident as to why the consumer lending landscape in North America is booming, consistently receiving the highest amount of investment as a share of total fintech funding • As digital banking initiatives like Chime and Dave grow and step to the forefront in the North America, how these players navigate the credit card world will be critical for future success The average American and Canadian statistically have 2.9 and 2.2 credit cards, and less than 1 debit card respectively 2.9 2.2 1.0 1.0 0.9 0.7 0.3 0.2 0.1 0.1 0.9 0.7 1.0 1.8 1.5 3.3 3.3 1.4 0.7 1.3 US Canada Sweden Australia UK Japan China Russia France Germany Credit Cards per Capita Debit Cards per Capita Card type per capita1 Views towards credit are most positive in the US, with one of the highest credit card incidence rates globally
  62. 62. White Star Capital Canada presents a fertile ground for fintech leadership 62 Source: News press. (1) Source: CBInsights. (2) Includes Finance, Insurance and Real Estate Rental and Leasing, as of March 2020. Source: Government of Canada Statistics. Global Outlook Canada is currently in the process of launching open banking initiatives similar to Europe • The Standing Senate Committee on Banking, Trade and Commerce has tabled a report calling for decisive implementation of the open banking framework by the Federal Government • Canadian fintechs are currently forced to use screen scraping technologies that leave consumers vulnerable to data breaches • Open banking is expected to provide more choice and improved financial products for Canadian consumers, and keep Canada internationally competitive • The government’s open banking review, which was first introduced in the 2018 budget, entered its second phase in January 2020. However, the consultation has since been delayed until at least autumn 2020 due to the global pandemic • Other proposals contained in the 2018 budget include the modernisation of the deposit insurance framework and an innovative retail payments system With a strong and stable financial ecosystem, increasingly forward thinking incumbents and regulators, prolific tech talent and savvy customers, Canada will present a fertile ground for fintech leadership in the coming years • The Canadian fintech ecosystem has seen significant expansion in the last 5 years with a surge of capital available to founders at all stages (+104% YoY in 2019 up to $776m1), showing growing interest from local and international investors • Financial services account for 21% of the Canadian economy2 and the ecosystem relies heavily on archaic infrastructure. We see this as a huge opportunity for players working to modernise it • Payments continues to lead all other categories, with Vancouver as a flagship hub Selected start-ups Fintech focussed funds Other notable fintech investors Borrowell Consumer Lending Total Raised: $72m Finn AI AI / personal banking Total Raised: $14m Bench SME accounting Total Raised: $49m Mylo Wealthtech Total Raised: $11m
  63. 63. White Star Capital Brexit, PSD2 and prevailing negative interest rates continue to set the backdrop for European Fintech 63 Source: Barclays, PYMNTS. (1) With their explicit consent. Global Outlook • A dwindling talent pool and an inability to passport services throughout Europe from the UK are some of the main concerns associated with start-ups in the UK following Brexit • For fintech in particular, the question remains, “Will the UK hold on to its title as a global hub for Fintech, or will other regions in Europe start to play more of a role?” • However it is expected that as large institutions move assets to mainland Europe, and other regions see an opportunity to take market share, Brexit will create a number of new opportunities throughout Europe The impact of the UK’s departure from the EU is still unclear As the follow-up to PSD1, PSD2 was meant to further establish a single market in Europe for payments, stimulating competition and improving the quality of services • PSD2 enables non-bank entities to manage financial transactions, forcing increased transparency of services and fees, and accelerating SEPA (Single European Payment Area), leading to faster and cheaper payments Europe-wide • It also enabled new services, such as Payment Initiation Service Providers (PISPs, enable the transfer of money directly from bank accounts, rather than through payment card providers) and Account Information Service Providers (AISPs, aggregators of customer payment account information) • This has enabled Open Banking in the UK, where the British government was able to require by law, that the UK’s 9 largest banks must provide companies with access to an individual or SME’s account data1 • This in turn allows individuals, lenders, and new financial institutions to automate manual and complex tasks and instantly collect and view data on bank transactions, opening up new doors for innovation • So far, the response from the industry on PSD2 has been mixed, largely due to the tight deadlines and limited guidelines, banks have fallen short of implementing this • How PSD2 develops, and whether it will play a major role in the European fintech landscape remains to be seen but we remain vigilant
  64. 64. White Star Capital Brexit, PSD2 and prevailing negative interest rates continue to set the backdrop for European Fintech 64 Source: Barclays, PYMNTS, European Central Bank. Global Outlook • Amidst competition concerns, Visa and Mastercard were forced to significantly decrease their interchange fees in the EEA • As this interchange fee was being shared with fintech players, it has impacted start-ups ability to monetise their users relative to their US counterparts • The cap has been widely regarded as successful by customer groups, however card issuers have managed to find new ways to increase fees and this is causing many start- ups to develop off-rail solutions In April 2015, the European Commission made commitments by Mastercard and Visa to reduce interchange fees by c.40% for payments in the EEA binding • The reduction of interest rates to near zero following the global financial crisis, and then to sub-zero years after, impacted major financial institutions through Europe, banks and insurers alike • The spread that these incumbents made on lending is now no longer enough and it has forced many of these businesses to innovate to improve their margins through diversification of revenue streams Following an extended period of low inflation and weak economic growth, the ECB resorted to negative interest rates to stimulate the European economy -0.3% -0.1% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% EURIBOR rate evolution 3 month 12 month Negative rates since 2015-16
  65. 65. White Star Capital Japan and South Korea benefit from supportive government programs and regulation 65 Source: Barclays, PYMNTS. (1) With their explicit consent. Global Outlook • Japan was historically held back by difficulty and opaqueness in obtaining banking licenses and an environment that favours the use of legacy technologies • However, over the last two years the Government of Japan has become increasingly supportive, presenting incentives to promote technological innovation such as: • Removal of Financial Services Agency approval requirement to acquire an interest (>15%) in nonfinancial companies - banks will only need to report said investments to the FSA • Changes to the country’s Banking Act have made it easier to incorporate APIs, allowing for a wider range of technology-based financial products and services, particularly in payment services, long dominated by big banks with considerable barriers to entry • Japan has been at the global forefront of cryptocurrency regulation, as the first country to provide a legal framework for Bitcoin and create a licensing regime for cryptocurrency exchanges in Apr-17. The FSA proposed amendments to the PSA and FIEA to strengthen the protections for investors in crypto assets went into effect in May-20 • As a result Japan is now the largest market for bitcoin with 23 approved exchanges. Many of them are beginning their international global expansion led by players such as bitFlyer, Quoine, GMO and DMM Japanese Government support is starting to show its results particularly with the proliferation of cryptocurrency • In 2019, the FSC began a major review of >200 fintech regulations including: • Amendments to the Supervisory Rules on Electronic Financial Transactions (effective Jan-19), allowing cloud adoption to process critical financial information • Amendments to the Finance Innovation Act (effective Apr-19) creating a "Regulatory Sandbox" allowing regulatory exemptions for fintechs and other favourable initiatives • Fintech has been identified by the South Korean Government as one of the top priorities for 2020, setting aside a budget of US$16m to support the sector, (~2x YoY), with further developments in Open banking, MyPayment and MyData expected this year • The rapid growth of P2P lending start-ups to tackle the unbanked population has come under scrutiny recently due to elevated delinquency rates and allegations of fraud involving some renowned fintech players • The National Assembly’s “P2P Act”, coming into effect on Aug-20, will require P2P lenders to disclose any financial incidents, delinquency rates of 15%+ and sales of bad loans, while high-risk financial instruments will be banned for these companies South Korea’s government is now pushing sweeping regulatory changes, setting up Korea for fintech innovation leadership
  66. 66. White Star Capital Southeast Asia is following in China’s footsteps with their own Super Apps, supported by forward thinking regulators 66 Source: Pitchbook, News press. Global Outlook • The explosive growth of mobile, internet and e-commerce penetration has led to the rise of Grab and Go-Jek, now the most valuable unicorns in SEA • Heirs of their Chinese counterparts (e.g. WeChat), they are also expanding into fintech- related services such as e-wallets and mobile payments. Grab has now built the largest payment ecosystem in SEA • Competition concerns and the power they will have to either stifle or encourage innovation will shape the development of the start-up ecosystem in SEA The future of Super Apps in SEA Regulatory bodies are focused on ensuring fintech can thrive while protecting consumers • Bank of Thailand and the Ministry of Finance launched the Payment Systems Act in 2018 to align regulations with international standards in efficiency, safety and security • In 2019, the Monetary Authority of Singapore (MAS) reviewed the e-payments user protection guidelines, requiring all banks and fintechs to notify users of all their e- payments, provide a reporting channel for claims, and assess all claims while providing a reasonable effort to recover the money • Personal data protection frameworks are being employed throughout the region too as SEA countries have become increasingly connected between themselves, and the rest of the world, particularly with the implementation of CBPR, the SEA equivalent to GDPR Indonesia Valuation: $9.5bn Total Raised: $6.3bn Singapore Valuation: $14bn Total Raised: $10.3bn Singapore has followed in Hong Kong’s footsteps with the launch of its digital-bank only licences • In 2019, MAS announced its digital banking licence initiative, which will allow entities without banking parents to perform banking activities • The aim is to encourage serving the underserved and establishing Singapore as a fintech hub for SEA • MAS announced they will issue up to 5 licences, that can graduate to a full banking licences in time • Licences will be issued in mid-2020, and other countries in the area are expected to follow suit Selected applicants
  67. 67. White Star CapitalWhite Star Capital Partnering with White Star Capital 67

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