How Big is the Fintech Addressable Market?
Fintech, or Financial Technology, has been around for some time. Lately, interest has been gaining steam, particularly among venture capitalists but fifteen years ago, this was the abbreviation used when banking discussed its plans for IT spending, mostly back office infrastructure. When you hear the term now it’s #fintech, referring to startups threatening to disrupt traditional banking and financial industries. Blockchain (Bitcoin), digital lending, payments and robo-advisors are some of the most popular.
The disruption is well underway and big money is flowing into the space. CB Insights recently released their quarterly tracking of this segment, Trends in Fintech: Q2 2017. VC-backed investment in global Fintech companies was $13.5b in 2016. Up from $2.6b in 2012, a CAGR of 51%. In the US, VC-backed investment was $5.7b in 2016, up an average 33% per year (CAGR) from 2012’s $1.8b.
While these are hefty investment numbers, they beg the question, how large is the market for Fintech? Public estimates of the “market size” are surprising scarce and difficult to reconcile. One reason may be that the definition of what constitutes “fintech” has been a moving target. With new platforms and software services evolving over time, the amount of potential revenue Fintech vendors are after has been changing as well.
In our case, we needed better information for planning. So we decided to share our internal survey of the industry and invite comments and participation from the Fintech community.
Under the guidance of our resident economist and CAO Kevin Duffy-Deno, the first step is a simple macro approach to sizing the market. Starting with US census data on total revenue earned by two key sectors targeted by Fintech vendors – banking and securities investment – we estimate and decompose the market geographically. We accomplish this using KDD Analytics ZIP Pointe Market Sizer, a Tableau-based market sizing tool based on ZIP Code-level Census data on over 7 million private sector business locations in the US.
US Financial Services Sector
For our purposes, the US Census (NAICS) data defines the financial services sector as consisting of 3 primary sub-sectors: Banking (522000), Securities and Investment Banking (523000) and Insurance (524000). Since our interest is in the sectors primarily involved with financial reporting, analysis and investor relations, we will focus our analysis on the Banking and Securities sub-sectors. The 2015 US Census data for Banking and Securities recorded total revenue of $2.2t. So how much of that is Fintech, where are those customers and how fast is it growing?
Published Estimates of Fintech Market
As suggested above, public estimates of the US Fintech market size are scarce and difficult to reconcile. Working from the research we found the current market is likely between 0.5% and 1.5% of total financial services revenue as reported by the US Census. Below are several sources we used for our first pass at the market.
An Ernst and Young report commissioned by HM Treasury (UK) estimated the California and New York markets for Fintech were $7.1b and $8.4b in 2015. Given that the US Census reported total revenue for NAICS 52 (all US Finance and Insurance) of $432.5b and $568.1b in 2015, the EY estimates for Fintech represent a share of total revenue of 1.6% and 1.5%.
A 2016 Citibank report came in a bit lower with an estimate that 1% of North American banking revenue has migrated to a digital model. Citibank projects that by 2020, this share will rise to 10%, then 17% by 2023 (see figure).
At the low end of the range, in their Annual Report, JPMorgan Chase disclosed it spent $600m on Fintech in 2016 out of a $9.5b technology spend, or 6.3%. Extrapolating to the US banking sector, this implies a Fintech market size of $5.3b or 0.33% of 2015 banking sector revenue. Additionally, JPMorgan’s Jamie Dimon commented on relationships with several independent Fintech companies highlighting the difficulty in separating its share of traditional banking revenue. We believe this will become even more challenging in the future as large banks absorb “Fintech” business models and technology into their operations. As Fintech gets more press, there will be even more marketing pressure to talk up the initiatives while it is unlikely that they will report them as separate line items on financial disclosures.
Top Fintech Metro Areas
Based on our initial survey of the research, we propose to use a revenue weighted average of the two sectors of .86%, 1% of revenue for Banking and .5% of revenue for Securities. We applied this percentage of .86% to the 2015 US Census Total revenue of $2.2t.
Conclusion: our baseline assumption for the Fintech share of the 2015 Banking and Securities market is $18.8b.
As a vendor, we want to know where the $18.8b in customers are located. Here’s the list of the top three markets for Fintech with the rest of the top 15 on the map above.
Rank - Top Ten Metro Areas by Revenue
New York-Newark-Jersey City, NY-NJ-PA
Dallas-Fort Worth-Arlington, TX
Los Angeles-Long Beach-Anaheim, CA
Unsurprisingly, the obvious suspects show up on this list, led by the powerhouse NY metro area. Over the course of the next posts, we will publish our findings on growth rate, segments, and the top ten metro areas with the biggest accounts in each. Let us know who you think will be 4 and 5, may not be who you think.
Tom & Kevin