The year 2023 was a tough one for fintech companies, with global investments hitting a six-year low, amid multiple challenges from high interest rates and inflation to global geopolitical conflicts, and difficulty in finding an exit.
The number of fintech deals as well as the total fintech investments last year was at their lowest since 2017, according to a report by consulting firm KPMG. Things are likely to remain relatively slow in the first half of 2024 too, and then begin to pick up as interest rates start falling in the second half of the year.
Total global fintech investments in 2023 declined over 42 per cent to $113.7 billion from $196.6 billion. The number of deals also fell significantly to 4,547 in 2023 from 7,515 deals in 2022.
"A storm of global challenges — from the high-interest-rate environment and stubbornly high inflation in many jurisdictions, to conflicts in Ukraine and the Middle East — combined with concerns about valuations and the barren exit environment, saw fintech investors becoming increasingly cautious with their investments," said KPMG.
The drop in fintech investments was seen across regions, with Asia Pacific seeing such investments plunge over 75 per cent. Europe, Americas, Middle East and Africa also saw fintech investments fall last year.
Despite the funding winter, two sectors—proptech and insurtech—saw investments surge. Proptech, or property technology companies, saw investments surge over three times to $13.4 billion from $4.1 billion and investments in Insurtech rose 37 per cent to $8.1 billion from $5.9 billion.
The payments space continued to account for the largest share of investments. But, investments even in this space tumbled to $20.7 billion in 2023 from $57.9 billion in 2022.
"The fintech market was quite challenged in 2023, buffeted by a range of factors, from high interest rates to the incredibly dry exit environment. While there were good deals to be had, fintech investors enhanced their scrutiny of potential deals, putting a sharp focus on the viability of business models and on profitability," said Anton Ruddenklau, global head of fintech and innovation, financial services, KPMG International.
AI (artificial intelligence) was a very strong area of focus for investors in the fintech market last year. AI-focused fintech companies attracted $12.1 billion in investment during the year.
It was a challenging year for fintech in the Asia-Pacific region, with investments plummeting to $10.8 billion in 2023 from $51.3 billion in 2022. The number of fintech funding deals in the Asia-Pacific region were also sharply lower at 882 versus 1,537.
"A stalled exit environment likely contributed to the low levels of fintech-focused VC investment in the Asia-Pacific region during 2023, with IPO markets particularly quiet in both China and Hong Kong," said KPMG.
Without exit opportunities, venture capital investors have been particularly reluctant about investing in later deal stages. Even in the Asia Pacific region, AI remained high on investors' radar, given its widespread applicability across areas like wealth management, payments and insurtech.
"Companies across fintech subsectors worked to leverage AI within their products and solutions. Investors showed a lot of interest in AI driven solutions," said Andrew Huang, partner - financial services, Audit, KPMG China.
KPMG said AI will continue to be a key focus in 2024, in addition to B2B (business-to-business) solutions.
"Looking ahead to the first half of 2024, investment in the fintech sector globally is expected to remain relatively soft, although investment will likely begin to pick up as interest rates reduce, with common consensus that this will be in Q3/Q4," the consulting firm said.
It also expects mergers and acquisitions to rise this year as investors will look for opportunities to buy distressed assets.