Last year was a challenging year for the fintech market, with total global fintech investment dropping from US$196.6 billion across 7,515 deals in 2022 to a six-year low of US$113.7 billion across 4,547 deals in 2023, with the Asia-Pacific region experiencing a particularly steep drop, according to a recent report.

Conflicts in Ukraine and the Middle East, the high interest rate environment, and the barren exit environment across regions saw fintech investors holding onto their cash throughout much of the year, finds the Pulse of Fintech H2’23, a bi-annual report published by KPMG highlighting global fintech investment trends.

The second half of 2023 showed a marginal gain over the first half, the report notes, with total fintech investment rising from US$55.5 billion in H1 2023 to US$58.2 billion in H2 2023. Six US$1 billion-plus deals contributed significantly to this result, including the:

• US$11.7 billion acquisition of US-based Black Knight by Intercontinental Exchange
• US$10.5 billion acquisition of US-based Adenza by Nasdaq
• US$6.9 billion private equity (PE) raise by UK-based Finastra
• US$1.2 billion buyout of US-based Avantax by Cetera
• US$1 billion venture capital (VC) raise by California-based Generate
• US$1 billion acquisition of Brazil-based Pismo by Visa.

VC investment was not so fortunate – dropping from US$27.5 billion to US$18.8 billion between H1 and H2 2023.

US, payments top

Regionally, the Americas accounted for nearly 70% of total fintech funding in 2023, accounting for US$78.3 billion across 2,136 deals. The US accounted for the lion’s share of this investment (US$73.5 billion). Comparatively, the Europe, Middle East and Africa region saw US$24.5 billion of total fintech investment across 1,514 deals, while the Asia-Pacific region saw US$10.8 billion across 882 deals.

At a sector level, the payments space attracted the largest share of fintech investment globally (US$20.7 billion) – although it was a major drop from the US$58 billion seen in 2022. By comparison, the property technology (proptech) and environmental, social and governance (ESG) were very hot with investors. Proptech investment reached a record high of US$13.4 billion in 2023.

ESG

Last year was the second-best year for ESG fintech investment on record, the report shares, with the US$2.3 billion in investment, up from US$1.2 billion in 2022, second only to 2021’s peak high of US$3.7 billion. The US accounted for the largest deals in this space in 2023, including the:

• US$1.1 billion deal by sustainable infrastructure start-up Generate
• US$1 billion PE raise by carbon custody platform Rubicon Carbon
• US$525 million VC raise by environmental commodities firm Xpansiv
• US$500 million raise by cleantech investment firm CleanCapital.

The combination of ongoing regulatory changes and the ambitious net-zero commitments by both governments and businesses will likely keep investment in ESG-focused fintech solutions on a positive trend heading into 2024.

AI interest

Interest in artificial technology (AI) gathered a lot of steam across the investment market over the course of 2023, the report states, and the fintech market was no exception. AI-driven fintech companies accounted for US$12.1 billion in investment in 2023.

While this reflects a significant decline in funding compared with the US$28.1 billion seen in 2022, the decline in investment does not reflect any lessening of interest in the space. During 2023, many financial institutions and fintechs chose to embrace AI through alliances and product spend rather than through direct investment.

Asia-Pacific steep drop

It was an incredibly soft year for fintech investment in Asia-Pacific, with only US$10.8 billion of investment across 882 deals in 2023 – down from US$51.3 billion in investment in 2022, representing a 79% drop – although the 2022 numbers were buoyed by the US$29 billion acquisition of Australia-based Afterpay.

Fintech investment in India was particularly soft, falling from US$6.8 billion to US$3 billion between 2022 and 2023, although investment also dropped in Singapore – from US$4.5 billion to US$2.2 billion.

Fintech investment in China rose year-over-year – from a 10-year low of US$800 million to US$1.9 billion. VC investment in Asia-Pacific dropped from US$15.4 billion in 2022 to US$7.8 billion in 2023. Of this, corporates participated in US$4.1 billion of deals.

The second half of 2023 was slightly slower in the region, with fintechs attracting US$3.4 billion in investment. VC raises accounted for the vast majority of investment in H2 2023, including those by:

• Hong Kong-based Micro Connect (US$458 million)
• Singapore-based boltech (US$246 million))
• India-based Perfios (US$229 million)
• Japan-based Gojo & Company (US$110.6 million).

Other areas

Global merger and acquisition (M&A) deal value dropped from US$98.2 billion in 2022 to US$56.4 billion in 2023; global VC investment declined from US$88.8 billion to US$46.3 billion year-over-year. PE growth investment showed the most resilience, up from US$9.6 billion in 2022 to US$11 billion in 2023.

Other notable sectors for investmemt included insurtech (US$8.1 billion), crypto and blockchain (US$7.5 billion), regulatory technology (US$2.6 billion) and cyber security (US$1.3 billion)

Going forward

Given the ongoing global conflicts, the high interest rate environment and the continued lack of exits, global fintech investment is expected to remain soft heading into the first quarter of 2024. As interest rates stabilize and possibly begin to decline, investment could begin to pick up. 

AI and business-to-business solutions will likely remain big tickets for investors. M&A activity could also start to rebound as investors more seriously look at distressed assets.

“The fintech market floundered somewhat in 2023, buffeted by many of the same issues challenging the broader investment climate,” says Anton Ruddenklau, global head of fintech and innovation for financial services at KPMG International. “While there were still good deals to be had, investors were definitely sharpening their pencils – enhancing their focus on profitability.”

Karim Haji, global head of financial services at KPMG International, adds: “The fintech market has been evolving and maturing since it got its start in 2004 and really came into its own in 2008. The technology underpinning fintech keeps changing – and right now, we’re seeing it change again with the application of AI and generative AI.

“You could say that we’re coming into the next wave of fintech. While the investment numbers are soft now – due to broader market conditions – the next year could be quite exciting for innovation in the fintech space.”