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Global Fintech Investment in 2023 – Why the Industry Remains Optimistic Following a Tough 2022

After reaching a record $238.9billion across 7,321 deals in 2021, total global fintech investment across M&A, PE, and VC fell to $164.1billion across 6,006 deals in 2022. While results were substantially lower compared to 2021’s peak highs, 2022 was not a poor year as a whole.

In fact, it was the third best year for fintech investment ever and the second strongest year for deal volume, according to the Pulse of Fintech H2’22 – a bi-annual report published by KPMG highlighting global fintech investment trends. The report went into an in-depth breakdown of how different regions performed throughout 2022.

The sharp drop-off in fintech investment between H1’22 and H2’22—from $119.2billion to $44.9billion — highlights the rapidly shifting market conditions much more clearly. H1’22 saw numerous $1billlion+ deals, including eight M&A—including the $27.9billion acquisition of Australia-based Afterpay by Block, two VC raises—Germany-based Trade Republic and UK-based Checkout.com, and one PE deal—US-based Genesis Digital Assets.

Comparing to H2’22

H2’22 by comparison saw just three M&A deals over $1billion all in the US, including the $8.4billion buyout of Avalara, the $1.7billion buyout of Billtrust, and the $1.6billion buyout of Computer Services Inc. The largest VC raise of H2’22 was an $800million raise by Sweden-based Klarna—in what was a significant rounding down (A). The largest PE deal was a $250million raise by US-based Avant.

Regionally, the Americas remained the dominant force of fintech investment globally, accounting for $68.6billion in investment in 2022; the US accounted for $61.6billion of this total. The Asia-Pacific region reached a marginal new high of $50.5billion during 2022, while the EMEA region attracted $44.9billion. While the payments space attracted the largest share of fintech funding in 2022 ($53.1billion), regtech was the hottest sector of the year, with investment rising from $11.8billion in 2021 to $18.6billion in 2022.

Anton Ruddenklau, global head of financial services innovation and fintech, KPMG International
Anton Ruddenklau, global head of financial services innovation and fintech, KPMG International

“2022 was a tale of two fintech markets. The variance between the first half of the year and the second highlights the rapid shift in investor sentiment amidst a combination of challenges — high inflation and rising interest rates, the lack of IPO exits, the downward pressure on valuations, and, of course, the turbulence in the crypto space,” said Anton Ruddenklau, global head of financial services innovation and fintech, KPMG International.

“But the news wasn’t all negative. Regtech, in particular, saw incredible investment in 2022, while seed-stage deals received excellent attention from investors after years of late-stage deals getting priority.”

2022 Key Highlights
  • Global fintech investment was $164.1billion across 6,006 deals in 2022 – down from the record high $238.9billion across 7,321 deals in 2021.
  • Payments remained the strongest area of fintech investment globally in 2022, with $53.1billion in investment compared to $57.1billion in 2021. Regtech was the only sector to buck the downward trend, with investment in the space rising from $11.8billion in 2021 to a record $18.6billion in 2022.
  • Investment in crypto and blockchain fell from $30billion in 2021 to $23.1billion in 2022. The decline in the second half of the year was particularly sharp—as scrutiny in the space picked up significantly in the wake of the May Terra (Luna) crash and the November bankruptcy of FTX.
  • Global M&A deal value dropped from $105.1billion in 2021 to $73.9billion in 2022; global VC investment declined from $122.9billion to $80.5billion year-over-year. PE growth investment dropped less sharply, falling from nearly $11billion in 2021 to $9.7billion in 2022.
  • The Americas attracted $68.6billion across 2,786 deals in 2022—of which the US accounted for $61.6billion across 2,222 deals, while the Asia-Pacific region attracted $50.5billion across 1,227 deals, and EMEA attracted $44.9billion across 1,977 deals.
  • Corporate-participating VC investment globally fell from $62.8billion in 2021 to $39.6billion in 2022.
  • The median deal size rose for both angel and seed-stage deals (from $1.8million in 2021 to $2.4million in 2022) and early-stage VC deals (from $5.75million to $6million)—while falling for later-stage VC deals (from $15million to $13.9million).
What to expect in 2023

Using KPMG’s findings as a basis for his comments, Ruddenklau discussed what he believed the fintech investment sphere might look like in 2023. He said: “With interest rates still rising, valuations are going to remain quite tricky for some time. This will likely keep a lot of the biggest potential M&A transactions on the shelf as investors wait to see if prices come down even further.

“That said, M&A activity will likely increase for smaller size deals as corporates and larger fintechs look to buy fintech capabilities at good value.”

The report concluded that H1’2023 would likely remain subdued for fintech investment. While there was a possibility of rising M&As, these were mainly predicted to take place among established, larger organisations. The general trend was that investors would be making safer investments. Despite this, the report highlighted optimism heading into the new year.

Wanting to find out if the industry agreed with this optimism, we reached out to hear from experts.

Regtech will remain strong
Leo Labeis, CEO at REGnosys
Leo Labeis, CEO at REGnosys

Leo Labeis, CEO at REGnosys, a collaborative low-code platform for regulatory reporting, resonated similar thoughts to those that were present in the KPMG report in regards to regtech’s resiliency: “The slump in UK fintech investment will create challenges in the short-term. But this downturn is far from a ‘doom and gloom’ moment for our world-class fintech industry.

“A tightening economic environment weans out business models that do not hold real value, and in the long run will bolster fintech propositions that address defined problems and genuine market need. A clear example of this is the regtech sector, which has emerged as one of the fastest advancing areas of financial technology over the past twelve months and whose growth is sure to continue.

“Regtech solutions are not just a ‘nice to have’. Against a backdrop of growing scrutiny from regulators and G20 regulatory reforms, regtech is playing a central role in helping financial institutions comply with new regulatory standards.

“With spending on regtech set to triple by 2026 alone, this challenging period for fintech will not derail the innovations that are poised to make a game-changing difference to our financial sector.”

A year of consolidation
Marcelo Bentivoglio, chief strategy officer at QI
Marcelo Bentivoglio, chief strategy officer at QI

Marcelo Bentivoglio, chief strategy officer at QI, the financial tools provider, was optimistic about consolidation in 2023, though was wary about high inflation and high interest rates and how they would impact capital for fintechs.

He said: “The high inflation high interest rate macro scenario will be true in 2023. So will be the cost of opportunity for investors which creates higher cost of capital for fintechs. That said, fintechs that depend on debt money to scale, such as lending providers, will have to adjust pricing and be open to rounds with worse terms.

“Alternatively, infrastructure providers can operate better as they don’t depend on cash to grow. Finally, fintechs that also hold financial licenses (and can hold deposits from customers) can benefit from the cash deposits floating revenue.

“It is very likely that we are going to see a consolidation movement in fintech. Entrepreneurs are going to look for opportunities to join forces and have a stronger balance sheet for the years ahead while investors are going to look out for potential investments which present good M&A opportunities as their use of proceeds.”

Correcting a record-breaking year

The drop in investment in 2022 from the offset may seem like a negative thing. However, when compared to a record-breaking year, any drop-off would have appeared negative. Ultimately, fintech is still in a very strong place in the investment world. Both Nikhita Hyett, European managing director, at BlueSnap and Juan Alonso-Villalobos, partner and board member of Startup Wise Guys, both suggested 2022 was a correction for previous years’ overly high valuations.

Booming embedded payments
Nikhita Hyett, European managing director, at BlueSnap global fintech investment
Nikhita Hyett, European managing director, at BlueSnap

Hyett said: “It’s easy to get caught up in changes in valuations and layoffs but it’s a cycle that the industry and the global economy are going through right now. It’s a consequence of the buzzy valuations we’ve seen for tech companies with shiny solutions in recent years, so it’s natural we’re now having that correction. What doesn’t change is the chase for the next big growth area.

“We still see huge opportunity in the embedded payments sector, for example, which is expected to reach £2.1 trillion by 2026. That’s a three-fold increase on today. With business’ bottom lines under pressure, monetising payments can not only help firms generate new revenue streams but turn a challenging economic environment into a competitive advantage. It’s this commercial imperative that will drive investor interest in the months ahead as fintech learns to go ‘back to basics’.”

Blockchain’s potential
Juan Alonso-Villalobos, partner and board member of Startup Wise Guys
Juan Alonso-Villalobos, partner and board member of Startup Wise Guys

Meanwhile, Alonso-Villalobos, commented: “A reduction in investments over the past year may be seen as a correction of the previous bubble in the fintech industry. This indeed will lead to a valuation adjustment in early and mid-stage startups, and founders may face challenges in getting the valuations they want as the investment flow becomes more demanding.

“Overall, fintech is still prevalent in 2023 and is expected to remain so, with a focus on payments, back-office standardisation, and using alternative data to aggregate loans and mortgages. Reducing the risk of insurance products and fraud detection, as well as digital identification or KYC management is another area for growth in fintech investment.

“People still see cryptocurrency as risky, but blockchain technology holds potential. There will still be money available for investment, especially in underdeveloped countries where there is a large movement towards financial inclusion and increasing financial knowledge.”

Author

  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

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