Background to the study In 2016, investments in financial technology (FinTech) companies have double compared with the same 1 period last year . So it is not surprising that the UK seems to be awash with FinTech companies – 2,000 today compared with 800 in April 2015 – receiving investments of £524m last year in a sector that 2 3 employs 61,000 people and generates revenues of £6.6bn. But the FinTech market is still young. There are only a few examples of FinTech ‘Unicorns’, young companies with market valuations above $1bn. And not many FinTech businesses are listed on the stock market. So few FinTech companies can report meteoric success. But the longer-term financial performance of such companies, and the return on investments by angels, trade investors, Venture Capital firms and Private Equity, is yet to be proven. 4 And sometimes, FinTech business fail spectacularly . Payments represent a significant proportion of the FinTech sector. Of the 350 leading FinTech companies in the 5 four segments surveyed by McKinsey & Co in early 2016, 43% were in payments. This part of the FinTech sector, increasingly referred to as ‘PayTech’, is developing fast, with the increased use of smart devices, new digital applications, alternative processing networks, wearable technologies and new payments processes. PayTech companies are positioning themselves to benefit from the 28% of today’s consumer banking and payments business that are said to be threatened by tomorrow’s FinTech businesses by 2020, and investors in PayTech are hoping they have tapped into a profitable, growing marketplace. But what are we able to say about investments in PayTech companies? What has been the most popular place to set up such a company? What happens to the funds invested in them and what is their most likely route to exit, if any? And what does this say about the future of PayTech and the money invested in it? The Emerging Payments Association (EPA) supports over 80 PayTech members, helping them grow their businesses faster, at lower cost and risk. It sets out to make the UK the global hotspot for innovation in payments, and in doing so, to shed light on important topics that help its members to differentiate themselves in a competitive marketplace. So with the support of our Benefactor, The Bancorp, the EPA commissioned the specialist payments consultancy, Accourt, to conduct research into the lifecycle of PayTech companies launched in the last five years. The research covered when the company was launched, the category it largely operated in (mobile payments, security, etc.), its location and the funding it received at launch and in total. It reviewed what happened to that investment, whether the company is still trading, exited (either IPO or M&A) or failed/disappeared. If the company exited, we determined at what valuation and, in the case of M&A, the acquirer/merger was also identified. This survey set out to identify the average lifecycle for an emerging payments company, the average level of seed funding, the average level of growth funding and the percentage that exited, failed or continue to trade. It also identified the most common type of exit and the most common type of acquirer. We hope this White Paper provides our members and the wider FinTech community with insights about the nature of PayTech investment. Thank you to The Bancorp for providing the resources to allow us to produce this report; to the crew at Accourt for undertaking the original research and analysis; and to our members, without whom none of this insight would be available. 1 Source: Finovate blog - Fintech Fundings: 36 Companies Raise $480 Million Week Ending March 18 2 Source: Ernst & Young, UK FinTech On the cutting edge, 2016 3 £6.6bn revenues for non-traditional, high growth FinTechs only – see fn.2, above 4 Source: BBC Online, Powa: The start-up that fell to earth, March 2016 5 Account Management, Lending and Financing, Payments and Financial Assets and Capital Markets 6 Source: Cutting through the noise around financial technology, McKinsey & Co, 2016 – 350 companies, not necessarily representative 7 Source: Blurred Lines: How FinTech is Shaping Financial Services, PwC, March 2016 EPA WHITE PAPER, PAYTECH INVESTMENTS, COPYRIGHT © MAY 2016 4