The global fintech sector has seen a significant drop in investment, falling from $62.3 billion to $51.9 billion, while investment in the UK’s fintech sector almost tripled in the first half of 2024.
The global fintech sector has experienced a notable decline in investment, with total funding dropping from $62.3 billion in the second half of 2023 to $51.9 billion in the first half of 2024. This 17% decrease, as reported by KPMG, reflects a broader trend of cautious investor behaviour amid economic uncertainties and high interest rates.
Conversely, investment in the UK’s fintech sector nearly tripled in the same period, with several major deals helping the country retain its title as the centre of European fintech funding. Total UK fintech investment reached $7.3 billion (£5.7 billion) over the six months, up from $2.5 billion (£2 billion) during the same period in 2023, according to figures from KPMG.
However, investment remains subdued compared to record highs seen in 2021, with geopolitical uncertainty, elevated inflation, and higher interest rates dampening investor confidence.
This year’s largest deals included the $4 billion buyout of financial software firm IRIS Software by Leonard Green, a debt and equity round for credit technology firm Abound that could extend up to £800 million, and digital-only bank Monzo raising $610 million.
The UK outperformed the wider Europe, Middle East, and Africa (EMEA) region, which saw a $7.7 billion drop in investment to $11.4 billion over the six months. British fintechs attracted more funding than their counterparts in the rest of EMEA combined, the data showed.
“With the new UK government in situ and the potential long-awaited drop in interest rates having finally arrived, there are hopes that fintech investment will start to show signs of recovery as we move into the latter part of the year and early 2025,” said Hannah Dobson, UK head of fintech at KPMG.
“We are expecting to see growing investment interest in AI and its use in the fintech and regtech space. Regulation remains a key focus in the EU – particularly with crypto and digital asset businesses as they navigate the new EU’s Markets in Crypto Assets (MiCA) regulation, which is expected to arrive in December 2024,” Dobson added.
Despite the overall reduction in investment value, the number of deals has remained relatively stable, with 2,255 deals in H1 2024 compared to 2,287 in H2 2023. Regionally, the Americas led the way with $23 billion in fintech investments, followed by EMEA with $17.4 billion, and the Asia-Pacific (APAC) region with $11.5 billion.
The payments sector continued to attract significant interest, and there was a noted increase in investment in the regtech sector. However, the decline in total investment value is attributed to high interest rates, economic uncertainties, and increased regulatory scrutiny.
Karim Haji, Global Head of Financial Services at KPMG International, noted, “The high cost of capital and geopolitical uncertainty linked to conflict and elections have put a significant damper on all global investments so far this year, and the fintech market isn’t immune to that.”
Despite the decline in total investment value, the number of deals has increased, particularly for smaller deals and early-stage startups. This rise in deal volume suggests a strategic shift among investors towards nurturing innovation and identifying high-growth opportunities in nascent fintech ventures. Investors are acting cautiously, especially regarding large transactions and mergers and acquisitions (M&A).
“Investors are acting cautiously, and not only when it comes to large transactions. On the M&A front, in particular, given concerns about valuations and the profitability of potential targets, investors are focused on improving the companies they already own rather than buying new,” Haji added.
This cautious approach is expected to continue, with fintech investment likely to remain subdued in the second half of 2024 due to the high interest rate environment and the approach of the US presidential election.
Despite the current challenges, there is optimism about the fintech sector’s long-term potential. The report highlights that deal volumes might continue to grow even if the average deal size remains smaller compared to previous years.
The focus on early-stage startups and smaller deals indicates a sustained interest in fostering innovation within the fintech sector.
As Haji pointed out, “There is some optimism that deal volume will continue to increase, but average deal sizes will likely remain small compared to historical norms.”