Global investment in fintech sank to a five-year low of $113.7 billion across 4,547 deals in 2023 as investors pulled back from making large deals amid concerns about stubbornly high interest rates, conflicts in Ukraine and the Middle East, falling fintech valuations, and the parched exit environment, KPMG said Tuesday.

According to its Pulse of Fintech report, the Americas attracted the largest share of investment during the year, accounting for $78.3 billion in fintech funding across 2,136 deals — of which the United States took $73.5 billion across 1,734 deals — compared to $24.5 billion across 1,514 deals in the Europe, the Middle East and Africa (EMEA) region and $10.8 billion across 882 deals in the Asia Pacific region.

Fintech investment globally grew slightly between the first and second half of the year, rising from $55.5 billion in the first half of 2023 to $58.2 billion in the second half of 2023.

Six $1 billion+ deals helped propel the second half results, including the $11.7 billion acquisition of USbased Black Knight by Intercontinental Exchange, the $10.5 billion acquisition of United States-based Adenza by Nasdaq, a $6.9 billion private equity raise by United Kingdom-based Finastra, the $1.2 billion buyout of US-based Avantax by Cetera, the $1 billion venture capital raise by California-based Generate and the $1 billion acquisition of Brazil-based Pismo by Visa.

Global venture capital investment in fintech dropped dramatically, both year-over year — from $88.8 billion in 2022 to $46.3 billion in 2023 — and between first half of 2023 ($27.5 billion) and the second half of 2023 ($18.8 billion).

While venture investment declined across all deal stages, investment in later stage deals fell off a cliff — dropping from $37.4 billion in 2022 to $14.1 billion in 2023.

While the economics of venture capital dealmaking changed dramatically over the course of the year, venture capital investors globally continued to show interest in a number of areas, most notably AI-focused fintech solutions.

Payments remained the strongest area of fintech investment globally in 2023, with $20.7 billion in investment compared to US$58 billion in 2022.

The segment accounted for the largest share of fintech funding in 2023.

The proptech sector saw a new high of funding in 2023, with over $13.4 billion in funding.

While this funding was primarily driven by the $11.7 billion acquisition of Black Knight, proptech is a growing area of interest to investors both from a property management perspective and an environmental, social, and corporate governance (ESG) and climate change mitigation perspective.

2023 investment in other notable sectors included, insurtech ($8.1 billion), crypto and blockchain ($7.5 billion), regtech ($2.6 billion), ESG fintech ($2.3 billion), and cybersecurity ($1.3 billion).

“The fintech market floundered somewhat in 2023, buffeted by many of the same issues challenging the broader investment climate,

“While there were still good deals to be had, investors were definitely sharpening their pencils—enhancing their focus on profitability,” said Anton Ruddenklau, Global Head Fintech and Innovation, Financial Services, KPMG International.

“While it was a depressed year for the fintech market overall, there were a few particularly bright lights. Proptech, environmental, social, and corporate governance (ESG) fintech, and investors embraced AI-focused fintechs—which helped particularly in the last six months,” he added.

It is noted that global fintech investments in the AI subsector experienced a slowdown, plunging from $28.1 billion in 2022 to just $12.1 billion in 2023.

However, this decline in direct investment does not reflect a dwindling interest in AI as many financial institutions and fintech firms worldwide have chosen to harness the power of AI through strategic alliances and product expenditure, rather than direct investment, throughout 2023.

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 (B2B) 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 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,” said Karim Haji, Global Head of Financial Services, KPMG International.

“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,” he added.

Ruddenklau, on the other hand, noted that 2024 is going to be a buyer’s market amid a fire sale.

“There has to be a fire sale because a lot of the incumbents can’t afford to keep running anymore. They’ve run out of funding pathway and their investors have no stomach given how the environment has shifted,

“Fintechs that have been disrupted somewhat by new technologies — particularly generative AI — are definitely struggling,” he added.

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