Happy Friday!

Citi is back with Round 2 of its fintech-focused Digital Disruption report. The first report was released in March 2016 and focused largely on Citi’s thoughts on the changing finserv landscape. The new report issued this month updates those views, and uses the lens of venture capital, including interviews with a few fintech VCs unaffiliated with Citi to provide some external voices.

You can read the 102 page report here or save a couple hours and pick up my key takeaways below.

VC dollars are shifting industries and business models… 
This should not come as a surprise if you followed the headlines this year. Lending startups have dropped from 58% of funding dollars in 2015 to 20% in 2016, while insurance tech has picked up most of the slack to account for one-third of all funds raised. Blockchain and Wealth Management also saw large increases. In addition, startups in the US are focusing more on B2B business models, as more companies partner with or sell to large financial services organizations to get distribution.

… and geographically
Chinese fintech VC activity is estimated to have doubled year-over-year, whereas most other countries saw large declines (US down roughly 38%). This trend in China extends beyond smaller startups, as Ant Financial (operates Alipay, China’s biggest online payments platform) raised $4.5 billion last year. Industry trends are quite different in China, as lenders still dominate funding, and B2C business models are much more prevalent. 7 of the 10 largest funding rounds were in China last year.

Country-specific disruption factors 
The chart below maps opportunities and risks to different players in a country’s fintech ecosystem. China, for example, is a good market for consumer fintech startups since the country is heavily digitally enabled, while the retail banking system is under-developed. Consumers have been largely ignored as the banking system in China caters to large corporations, state-owned enterprises, and government-related activities. Contrast this with the UK, which also has a digitally-enabled population, but a much stronger consumer financial system. While meaningful fintech businesses can still be built in the UK, they will face much stiffer competitions as legacy players with customers and distribution evolve their offerings.




Predictions on fintechs achieving significant market share 
While it is easy to celebrate seemingly overnight success stories and watch companies go from zero to $1 billion in a few years, it will generally take longer for fintech companies to scale as compared to a consumer tech company. The time frame will vary by country and industry, as Alipay and WeChat have already taken over Chinese payments, but traditional banks still largely control small business lending in the U.S. Most VCs cite regulation as the main challenge for scaling a fintech startup. However, incumbents can’t rest – disruption happens, as Hemingway would put it, “Gradually, then suddenly.”

In addition to the above, the report covers all of the buzzwords in great detail – regtech, AI, cybersecurity, deep learning, natural language processing, etc.


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