Global FinTech Investment Declines to Lowest Since 2020, KPMG says

The amount of money pouring into financial technology companies as investment has slowed to a four year low as high interest rates and uncertainty about geopolitical developments put the brakes on activity, a report from consulting firm KPMG shows.

In the first six months of the year investors deployed $51.9bn of funds globally into fintech firms, representing a 17% drop from the second half of 2023 when $62.3bn flowed into such companies. The scale of investment is the lowest since the first half of 2020 with only five deals hitting the $1bn mark globally, all of them buyouts.

Investment declined in all regions with Europe, Middle East and Africa registering the sharpest drop with a 41% decline compared with the previous six months. US markets remained relatively buoyant, with the Americas region chalking up four of the five $1bn+ deals.

“2024 got off to a challenging start for the fintech market globally, driven by ongoing concerns related to geopolitical uncertainty and high interest rates,” Anton Ruddenklau, Global Head of Fintech and Innovation, Financial Services, at KPMG International wrote in the company’s Pulse of Fintech publication.

Ruddenklau described overall investor sentiment during the period as “restrained.”

“With interest rate cuts taking longer to materialise than initially expected, the pickup in investment activity predicted in the second half of last year is taking longer than originally thought to come to fruition,” he added.

Payments attracts the most investment, RegTech Shines

On a sector level payments continue to be a key focus for investors, with companies in the space attracting $21.4bn, the bulk of fintech funding globally, in the first half of the year. This is just shy of the total last year. Despite the seemingly positive first half, Courtney Trimble, Global Lead, Payments, at KPMG International, said the numbers mask a less cheery story as two deals made up nearly $19bn of the overall amount.

“Outside of these two significant outlier deals, total global investment in the payments space was incredibly subdued. Deal volume was also very soft, with just 231 payments deals seen globally in the first half,” Trimble wrote.

AI remains a “very hot area of interest,” particularly in the US, KPMG said. While payments attracted the bulk of funding and AI hogged the limelight, RegTech companies were the only sector that saw an increase in investment overall. The regulatory sector attracted $5.3bn in investment in the first half of the year, already beating last year’s total as both VC and PE investors showed an interest in the space.

“[Investors see] it as a sector with sustainable growth opportunities given the growing pressure on financial services companies and other organisations needing to comply with increasingly complex and detailed regulatory requirements,” Trimble said.

Still, VCs were reluctant to commit to deals amid the economic headwinds and  M&A activity focused on consolidation as investors attempted to cut costs by scaling and expanding their reach.

Cryptocurrency and blockchain investment, meanwhile, stabilised following steep drops in 2023. The sector drew $3.2bn of funds globally although large deals remain absent. The approval of ETFs based on Bitcoin and Ether has blurred the lines between traditional financial markets and crypto, with tokenization emerging as a key trend.

The dialled-down appetite for risk was evident in investors’ preferences. Rather than seeking out the cutting-edge, they preferred mature and stable markets but even there there was a reluctance to do large deals.

“Heading into H2’24, fintech investment is expected to remain subdued — except, perhaps, when it comes to AI and generative AI — given the continued high cost of capital and geopolitical uncertainty,” Ruddenklau said.

Only a third of companies are ready for DORA

In January next year financial services firms operating in the EU will have to comply with  Digital Operations and Resilience Act (DORA), a set of rules that aims to strengthen the cybersecurity arrangements of banks and other financial institutions. Despite the rapidly approaching deadline, KPMG’s gap analysis shows that only 32% of regulated entities are ready for the new rules.

This could prove to be an opportunity for firms that offer cybersecurity solutions, particularly if they’re using AI, which will garner the most attention from investors according to the study.