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KPMG Q4’16 Pulse of Fintech Report reveals sharp decline in global fintech investment in 2016 despite record VC funding

 Global investment into fintech companies was down across the board in 2016 as political uncertainty heated-up and the fintech hype cooled, according to KPMG International’s ThePulse of Fintech – a quarterly report on global fintech investment.

After 2015’s record-setting US$46.7 billion in total global funding to fintech companies, 2016 experienced a decline in the market with a 47.2% slide in fintech investment globally.

In the UK, tallying up both M&A and venture investment, it is clear that there was a distinct decline between 2015 and 2016 in activity. Overall investment in UK fintech companies fell more than 85% with deal value down from $4.6 billion in 2015 to $654 million in 2016. In keeping with European trends, however, the volume of deals remained healthy with 124 completed during the period.

London continues to be seen as one of the truly global financial centers which, along with a vibrant tech startup sector, has helped create a strong environment for fintech firms to start up and scale. Venture capitalists continue to show a strong interest in the sector with deal volume up to 96 from 93 in 2015 even as value decreased 36% in the period.

In Europe, total fintech investment dropped 80% from $10.9 billion in 2015 to $2.2 billion in 2016.  Despite this, transaction volume remained relatively resilient with 318 deals completed during the year and we also saw a rise in European VC funding from $1.2 billion to $1.4 billion over the same period.

Commenting on the findings, Warren Mead, Global Co-Lead Fintech, KPMG, said:

 “2015 was an investment high and we are now seeing fintechs starting to gain scale as a result of that funding. This meant investors paused for breath in 2016 to see which fintechs are likely to emerge as the winners before deciding where to place their bets.

 “As a result, Europe saw a significant fall in funding which was also due, in part, to Brexit related uncertainties in the UK. Despite this, the UK Government and regulator have indicated they are committed to supporting and promoting the fintech sector and London remains a dominant force with the European Fintech market – 5 of the top 10 European fintech VC deals happened here last year.

 “If 2015 was an investment party, then in 2016 the Shoreditch hipsters got back to work – the hard slog to success starts here.”

 Outlook strong for 2017

The report clearly highlights areas for optimism for 2017 and beyond. The Payment Service Delivery Directive 2 (PSD2) is going to be a game changer in Europe with huge demand for niche fintech companies who can create specialised offerings that might not be profitable without the open data mandate.

Insurtech is also expected to be an attractive area of investment in 2017, with many insurance companies looking to play catch-up with the advances already made in the banking and financial services sectors.

Growing applications of innovative technologies like wearables, the Internet of Things and artificial intelligence are also likely to spur further investment.   There is also likely to be increasing participation of tech giants in the fintech sector.

Warren Mead added:

 “Whilst global investment is down, fintech remains an attractive proposition as traditional financial services face pressure to cut operational costs and improve customer propositions. 2017 has already seen some significant deals like Funding Circle who raised another $100m. The Moneygram deal is also evidence of what I predict will be a growing trend of fintechs entering the traditional finance space.

 “I also anticipate we will see more consolidation through 2017, particularly in the more mature fintech areas of payments and P2P lending.

 “In the UK, the Government and regulators have demonstrated that they are committed to supporting and promoting the sector. As well as launching the world’s first Regulatory Sandbox, the FCA has created fintech bridges with Australia, Singapore, Korea and China to strengthen regulatory collaboration and help fintechs scale internationally.

 “Nevertheless, questions remain following the 2016 Brexit vote, particularly regarding access to talent and EU passporting.”

 Key 2016 annual highlights

 Total 2016 fintech funding declined to US$24.7B from US$46.7B in 2015, while deal activity dropped from 1,255 to 1,076.

  • VC funding to fintech companies reached a record US$13.6B compared to US$12.7B in 2015, with 840 deals recorded.
  • Overall fintech deal funding in Asia grew slightly year over year, reaching a new record high of US$8.6B invested compared to US$8.4B in 2015. 3 mega-rounds accounted for over half of this total.
  • Both overall funding and VC funding to fintechs declined in the US, with totals of US$12.8B and US$4.6B respectively.
  • Corporate VC investment in fintech rose for the seventh straight year, reaching 145 deals, US$8.5B in 2016.

 Key Q4’16 highlights 

  • Quarterly VC funding to fintech companies increased from US$1.9B to US$2.1B between Q3’16 and Q4’16, yet remained weak compared to early year quarterly results.
  • Asia VC funding rebounded in Q4’16 to US$680M after reaching a low of US$200M in Q3’16, primarily driven by a US$384M+ mega-deal in the quarter.
  • VC investment in the Americas and the US fell in Q4’16, to US$1.1B and US$900M respectively. Canada bucked the region’s downward trend, reaching a new high of US$138Min fintech VC investment.
  • Europe-based VC investment remained relatively stable in Q4’16, with US$319M in fintech investment. Over the same period, the number of VC-based fintech deals increased from 52 to 63 deals.

 *Note: All figures cited are in USD; data for the report provided by PitchBook.