Our FinTech & Venture Lead, April Bellchambers, recently sat down with Nick Rugg from Markel to chat about the state of the market.
Nick is Markel’s Head of FinTech and Investment Management Insurance and has over 20 years’ experience in the insurance industry. In fact, he was part of the team that launched Markel’s first FinTech insurance product in 2016. As a recognised market leader, Nick has underwritten risks across many FinTech subsectors – like payments, neobanks, WealthTech, LendTech, and InsurTech. He’s done it for businesses of all sizes too – from startup to unicorn – in territories across the world, including the UK, Europe, Asia, North America, and Australasia.
Safe to say, he knows what he’s talking about. So what did he think about last year’s funding landscape? And what does he predict is in store for us this year?
What happened in the market in 2023?
Last year we saw a big shift in the availability of capital for FinTech investment, driven by the sharp increase in global interest rates to combat inflation. FinTech companies have historically relied on easy access to funding in order to scale, but what we’re seeing now is companies switching from growth mode to profitability mode.
Because of the cost of capital, investors want to see a return on their investment much faster than in previous years. Business plans are having to change. Costs are having to be cut. Those companies that have a sound business plan and are able to pivot to this strategy without compromising their products and services will be the ones that succeed.
What are your predictions for 2024?
Hopefully we’ll see a more stable economic environment. If interest rates hold or reduce, there should be an increase in investment in the FinTech industry.
Artificial intelligence is also likely to dominate the headlines this year as FinTechs start to harness it to improve operational efficiency and offer new products. And I expect the prevalence of open banking to increase, too, as more companies look to make use of this technology. The European Commission announced its PSD3 plans last year with the aim to increase adoption, enhance competition, and improve consumer protection. Electronic payments have also continued to increase year-on-year.
What are the current attitudes of VCs towards FinTechs, and have they changed?
In 2023 there was a 44% drop in VC funding for the industry compared to 2022. However, I think it’s important to remember that VC funding for FinTechs was still higher than many years previous to that – so there’s still a healthy amount of investment going into the sector.
In terms of where VCs are generally investing, we’re seeing a larger allocation to B2B FinTech companies than to B2C. This is a reverse of the allocation that we saw in previous years. I think that’s probably a consequence of macro-economic factors: higher interest rates mean lower disposable income for consumers, leading to a drop in consumer purchasing and lower credit quality.
What trends are you seeing in FinTech right now?
Embedded finance is an area I expect to continue to grow. Ecommerce companies are seeing the advantages of being able to offer financial products through their platforms – namely that customers are spending more because the service is so convenient.
I also think that there will be growth in the BNPL industry. As the regulatory environment becomes more certain, I can see more companies look to offer this service. Consumer adoption rates of BNPL products continued to rise last year and show no signs of slowing.
Which insurance risks are going to become more prevalent in 2024?
Cyber and crime exposures will continue to increase in 2024. Ransomware attacks are still on the up, and the sophistication of tactics used by cyber criminals to infiltrate a company’s IT security are reaching new levels. For instance, we’re seeing the use of ‘deep fake’ techniques which can mimic a person’s voice or image in order to fool the company or individual and steal funds. It’s likely that a lot of companies don’t have adequate security controls in place to defend against these tactics yet.
Regulatory scrutiny of certain sectors will also increase or change, which can lead to costly investigations or sanctions. We’ve seen the FCA continue to focus on inadequate AML (anti-money laundering) and client safeguarding processes within FinTech companies, and introduce its Consumer Duty rules. This raises the standards of B2C companies and outlines how they must act responsibly towards customers. The FCA will be keeping a close eye on this area and checking for non-compliance. The BNPL industry will be of particular focus for regulators as they start to get a grip on this industry, and some FinTechs will also have to navigate uncertain regulatory standards regarding their use of AI.
Protect your FinTech in 2024 – and beyond
Whatever the next 12 months throw at the sector, Capsule and its insurance partners stand ready to support you. Our proactive approach ensures you remain protected as the market – and your needs – change.
To discover what it means to work with someone that understands the challenges of scaling in the FinTech space, book a 30-minute meeting with us.