Analyst Forrester has reported on the global funding trends in FinTech and InsurTech startups, and it's not getting any easier for these industries.

On the FinTech side, during the third quarter funding “remained tepid”, said Forrester, and went disproportionately to a few sub-categories. It said about 52 per cent of Q3 funding was invested in just 10 companies.

Most financing went towards digital lenders, digital stockbrokers and digital banks. VCs and incumbent financial providers continued the trend of putting money into well-established and often crowded FinTech areas, said the analyst.

While this fits in with a longer trend away from seed and early-stage funding and towards late stages, the economic slowdown caused by COVID-19 will result in an “ongoing drop” in FinTech funding over the rest of the year, warned Forrester.

Some of the highlights in the third quarter included Klarna closing a $650 million private equity round that brought its total funding to $2.8 billion, and HSBC and Mastercard funding Episode Six - which offers highly configurable ledger and payments systems.

Forrester predicts that as the going gets tougher in the FinTech space, certain companies will “consolidate power”. Established firms that have enough capital on their books and innovate rapidly, along with FinTechs that have already secured funding and can put it to good use, will have the “upper hand”, it said.

Aurelie L’Hostis, a Forrester analyst, said: “We’ll see a wave of consolidation. With FinTechs at lower valuations, incumbent banks and other established firms now have an opportunity to either invest in or acquire startups, to gain access to experienced talent, expand into new markets or segments, develop new products and technologies, enhance data capabilities and automate back-office processes."

In InsurTech, while COVID-19 “dampened trends” early on in 2020, “resilient” global equity markets helped “drive interest” in insurance innovation. InsurTech funding contracted about 40 per cent in Q1 as COVID-19 set in, but increased 36 per cent in Q2 as investors and insurers “adjusted to a changing normal”, said Forrester.

Funding continued to “accelerate” in Q3, increasing 31 per cent to $1.7 billion from $1.3 billion in Q2, as investors and insurers found value in late stage, digital insurance startups - investments in them represented over 70 per cent of funding in Q3. This trend will continue in Q4 and into 2021, Forrester said.

Health insurance was the most popular category. In Q2, venture capital investors channelled funding to auto insurance-focused InsurTechs. In contrast, Q3 saw digital health insurers such as Bright Health and Waterdrop draw interest from investors, with this category receiving around 51 per cent of funding.

Forrester analyst Jeffery Williams said: “Investors and insurers continued to fund InsurTech startups that digitise the customer journey and the insurance value chain. Although 2020 started off slow, it is on track to be the third-highest year for funding since tracking began in 2010.”

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