Challenger banks ride record wave of venture capital, report shows

Dive Brief:

Digital-first challenger banks are taking in venture capital at a record pace, according to a report released Tuesday by research company CB Insights.
The financial startups raised $649 million from 17 deals in the second quarter of 2019, an 8% increase from the same period last year. Year-to-date funding for 2019 stood at $2.5 billion through the end of July, surpassing the $2.3 billion from all of 2018, the report said.
Challenger banks have been the fastest-growing sector among fintech startups, and 25 banks have more than 1 million users, according to CB Insights data. Venture capitalists invested $1.5 billion in challenger banks in the first half of 2019, a 15% increase from the same period in 2018.

Dive Insight:

Open banking rules in Europe have fueled the growth of challenger banks, and a significant number are trying to gain a foothold in the U.S. Britain's Monzo launched its app in the U.S. in June, and Germany's N26 followed last month. Meanwhile, U.S.-based Chime quadrupled its customer base in the past year to 4 million, according to a June report from CNBC.

The companies winning the largest rounds of capital are expanding from "monoline to multiline" — meaning they're branching out and offering new services, presumably to catch consumers at different stages of their lives, according to Lindsay Davis, a CB Insights intelligence analyst.

Still, much of the companies' growth can be attributed to new business from millennials who are “coming into wealth for the first time,” Davis said. Customers had opened 30 million accounts with the startups, the report said, although that figure does not include China and India.

U.S. fintech startups saw 14 "mega-round" investments worth more than $100 million in the second quarter, but the U.S. is not the only region of concentrated growth. Brazil's NuBank became the largest Latin American fintech company in July after raising $400 million from a group of investors including Goldman Sachs. The bank opened a second headquarters in Mexico and is focused on making inroads into a segment of 100 million unbanked or underbanked customers in Latin America.

European fintech companies raised $3.3 billion in venture capital in the first half of 2019, up from $1.9 billion in the same period last year, the report said. An index of European Union banks, however, has dropped 39% the past 18 months, according to Bloomberg.