Which Fintech Sectors Are Attracting the Most Startup Funding?

“We are in the first innings of a revolution,” says

Jordan Nof,

co-founder and managing partner of Tusk Venture Partners, a New York-based investment firm that is focused on new fintech opportunities. “The best deals I’ve ever done in my life are the ones that are solving problems you never knew you had.”

One reason for Mr. Nof’s optimism is that many new business concepts have encouraged engineers in financial services to look for entrepreneurial opportunities, finding problems or inefficiencies in the ways their segment of the market operates. “Now, they are getting the backing to solve really big problems,” he says.

So far, a handful of business categories continue to capture the lion’s share of fintech funding. One of the most visible has been consumer payments, where companies like

Affirm Holdings,

AFRM 2.22%

Block

(the parent company of Square) and Klarna are shaking up the retail landscape. Want to buy a Peloton bike or the latest

Apple

device? These days, buy-now-pay-later businesses are teaming up with established brands to help shoppers spread payments over a few months. This model appeals to consumers because it is less costly and more transparent than store credit cards; businesses like the fact that it fuels sales growth.

“This area—focusing on retail investors and retail consumers—produced clear winners last year,” says

Joshua Uhl,

New York-based head of the fintech practice for Deloitte. “There is more evolution and upside to be had in these segments.”

Farmland and sports

Another hot trend within the fintech world in 2021 was what is known as fractionalization. All sorts of startups are allowing investors of all kinds to invest in asset classes that once would have been inaccessible. Want to put money into farmland, sports memorabilia, fine art or music royalties? No problem: Blockchain technologies give startups the tools to make that less risky and more liquid.

Performing artists like rapper Nas are turning to fractional ownership to sell royalty interests in their songs via Royal, a music marketplace, while Alt offers investors a way to own and trade tokens that represent an interest in collectible sports cards and other memorabilia. Both saw big jumps in valuation last year: Royal’s first funding round last summer raised $16 million in seed capital, while Alt launched with $31 million in startup funding. The enthusiasm for these models among early-stage backers is such that both companies announced new funding rounds and big jumps in valuation only months later. (Royal pulled in $55 million in November; Alt scooped up $75 million in December.)

Indeed, many venture-backed payments companies that haven’t yet followed Affirm to the IPO market still see eager interest from investors in new private funding rounds. Bolt, a San Francisco company offering one-click checkout, appeals to shoppers by promising fraud protection, and to retailers like Brooks Brothers and Forever 21 by facilitating the process of placing orders. The company is now worth an estimated 30 times what it was only 30 months ago, according to the details of its just-announced series E funding round.

New entrants

Deloitte’s Mr. Uhl points to other fintech areas that are attracting funding. Among them: the back office.

A company called Lithic, for instance, tackles back-office problems that historically have made it time-consuming and costly for developers to launch debit and credit-card programs. It closed on two rounds of new funding last year as interest in its technology grew. (Investors include Mr. Nof’s Tusk Ventures.)

Another emerging hot spot might be the financial-advisory business. While

Robinhood Markets

HOOD -4.90%

has shaken up the trading universe, services offered by financial planners and other advisers tend to depend more on personal relationships than on, say, apps. But that, too, is changing, says

Samuel Deane,

an Atlanta-based financial adviser and co-founder of WealthTech Ventures.

“There are so many new tools out there that may help advisers keep their clients on track,” Mr. Deane says. For years, he has beta-tested tools being developed for advisers. The logical next step, he says, is to put money into the best ones. Some address behavioral finance concerns—for instance, prodding clients to review asset allocation in the wake of market movements. Others, Mr. Deane says, offer new and sophisticated ways for advisers to factor in tax considerations when providing investment advice or discussing the way a client’s compensation package is structured. Mr. Deane says he is evaluating a company that would use blockchain technology to facilitate contracts and billing between advisers and clients.

As regulators establish new rules and guidelines (a year-old special office at the Securities and Exchange Commission, known as FinHub, is one group working on just that), market watchers expect last year’s explosive growth in investing to continue. 

Mr. Uhl agrees, saying, “An incredible amount has happened in a very short period of time, but I expect we’ll see fresh waves of activity as technological evolution keeps pace.”

With so many startup investors now being drawn to fintech companies, and as that enthusiasm filters through to the public market, there’s always the risk that some businesses will disappoint or that investors, in their rush to grab a share of the latest trend, won’t do adequate due diligence. “But,” says Mr. Deane, “I think there are still so many opportunities out there that we won’t see a fintech bubble emerge for a while.”

Ms. McGee is a writer in New England. She can be reached at reports@wsj.com.