Investment Banking

Fintech Deal Activity is Plummeting

Fintech Deal

Global investment in the financial technology (fintech) sector fell by 50 per cent in 2016, according to the latest expert analysis.

While 2015 saw a record-breaking $46.7 billion pour into fintech companies across the world, a total of just $24.7 billion was funded in 2016 – just over half the previous year’s total. The trend was consistent from the second quarter onwards, with funding of just $1.6 billion in Q2 of 2016, down from $1.7 billion the previous quarter, and from $2.4 billion in Q2 of 2015 . In the third quarter, both the number of deals and the value of funding fell across the fintech sector, with investment falling by 17 per cent year-on-year to $2.9 billion . By the end of the year, total deal flows tallied at $24.7 billion.

The data room report pointed to a “cautious” political environment, noting that “this caution likely played a part in the significant decline in total investment in fintech globally.

“The decline reflects major decreases in mergers and acquisitions and private equity funding related to fintech,” the report’s writers went on to say. “However, global venture capital investment showed an opposite trend, reaching a new high of $13.6 billion. The resilience of the venture capital market for fintech opportunities suggests that fintech will continue to be an attractive sector in the future.”

The Pulse of Fintech is a quarterly report published by KPMG which analyses the current and emerging trends in the fintech sector, and it is widely cited across the sector by investors and innovators alike.

The latest report is careful to point out that despite a disappointing performance, 2016 was still the third-most successful year for fintech investing since their records began in 2010. And there are more than a few bright spots amid the analysis.

‘Insurtech’ and ‘regtech’ are on the rise, while the massive $4.5 billion investment in Ant Financial’s Series B round helped corporate venture capital volumes increase by 17 per cent last year, to an all-time high of $8.5 billion. Likewise, Bitcoin and blockchain-based investments rose last year, as investment banks such as J.P. Morgan begin experimenting with cryptocurrency applications and the vast data storage potential of blockchain technology.

Insurtech has been on an upward trend since early 2016, with 47 deals netting $1 billion in the first half of the year, and almost $2 billion over the full 12 months.

“There seems to be significant pent-up demand for solutions to the problems challenging the insurance industry – from the need to improve operational efficiencies and cost effectiveness, to creating more consumer-centric product offerings,” said report co-writer Murray Raisbeck, partner, insurance, KPMG in the UK. “When these challenges are combined with the growing availability of tech from other sectors with applicability to the insurance sector, there’s little doubt investment in insurtech is going to keep booming.”

Health insurance and life insurance have proven to be the most popular, although it remains to be seen how the new American Health Care Act will impact this sector.

Regtech too has attracted plenty of attention from investors. Regulation is an ongoing concern for any financial firm, and any technology which can help streamline regulatory processes will be in high demand. According to CBInsights, regtech startups have raised almost $3 billion across 405 deals since 2012, and deal activity reached a new high in 2016, with 102 deals completed . Demand was particularly high in areas surrounding risk management, compliance, data management and reporting.

While insurtech and regtech seem likely to thrive in the year ahead, the same cannot necessarily be said for the wider fintech sector. The M&A boom of recent years may mean that funders have reached the limits of what they are prepared to invest, and while there is still a clear demand for any tech solution which can improve data storage and cyber security, most potential funders are – quite understandably – waiting to see proven results before they pursue any new deals.

Furthermore, the combination of Brexit, the Trump presidency and slowing growth in China is also set to influence investor sentiment, creating a more cautious ‘wait and see’ environment for investors of every description.

So far in 2017, overall M&A activity in North America has decreased by five per cent year-on-year , and there has been a clear dearth of fintech deals in the first quarter of the year. However, as the year goes on and corporations start to look for growth opportunities, there is every chance that fintech deals could pick up again before the year is out.

Related topics:Financial services
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