Fintech investment plunges in year of two halves
Investment into the UK fintech market plunged 56% last year, despite a surge in the flow of capital into Scotland.
Private equity and venture capital firms pumped $17.4bn into the UK sector compared with $39bn the previous year, according to KPMG.
In its latest Pulse of fintech report, KPMG said investments in the second half of 2022 were much lower than the first six months as “higher interest rates and inflation alongside downward pressure on valuations dampened investor appetite.”
There were 593 private equity and venture capital fintech deals in the UK in 2022, compared with 724 in the year before.
In a year of two halves, $11.8bn was received in the first half of the year, with 365 deals, compared with $5.6bn investment and 228 deals in the second half.
In the last 12 months, Scottish fintech companies received about £305m to support their growth and development, representing an increase of more than 200% on the previous year, according to data from Fintech Scotland published last month.
Just under two-thirds (60%) was raised by fintech SMEs focused on payment and data innovation, followed by wealth management solutions and financial regulation.
The number of Scottish fintech SME firms increased to 211, a 13% increase over the year, driven by startups and international firms setting up in Scotland.
Despite the falling investment across the UK, KPMG’s UK head of financial services, Karim Haji, said it was a strong year for the UK fintech industry. “The UK is a major global player, with investment in UK fintech only behind that of the US and Australia,” he said.
Investment with UK fintechs attracted more funding than those in the rest of Europe combined.
Global investment in fintech last year fell 31% to was $164bn, compared with $239bn in 2021, which was a record. There were just over 6,000 deals last year globally, compared with more than 7,300 in 2021.
Last year was still one of the highest on record with some areas of still seeing growth. Regtech, as a sub-sector of fintech, bucked a downward trend by growing in size and reaching $18.6bn.
Anton Ruddenklau, global head of financial services innovation and fintech at KPMG International, said: “2022 was a tale of two fintech markets.
“The variance between the first half of the year and the second highlights the rapid shift in investor sentiment amidst a combination of challenge – high inflation and rising interest rates, the lack of IPO exits, the downward pressure on valuations, and, of course, the turbulence in the crypto space.
“But the news wasn’t all negative. Regtech, in particular, saw incredible investment in 2022, while seed-stage deals received excellent attention from investors after years of late-stage deals getting priority.”
“With interest rates still rising, valuations are going to remain quite tricky for some time. This will likely keep a lot of the biggest potential M&A transactions on the shelf as investors wait to see if prices come down even further,” said Ruddenklau.
“That said, M&A activity will likely increase for smaller size deals as corporates and larger fintechs look to buy fintech capabilities at good value.”
The fintech sector, which has attracted huge investments over the past few years, is currently cutting back amid challenging market conditions.
Fintech giant PayPal has said it will cut 2,000 jobs – about 7% of staff – as it expects the current challenging economic conditions to continue.
Earlier US fintech firm LendingClub also announced cuts, with 14% of its workforce set to go as high interest rates stifle demand for its lending services. Meanwhile, UK payments infrastructure financial technology firm Paddle is reducing its workforce of more than 350 by 8% as a boost to its business during the Covid-19 pandemic comes to an end.
The UK fintech sector was recently backed by the government as a future growth industry. In a recent statement about the UK fintech sector, Paul Scully, digital economy minister, said: “Despite global headwinds, British fintech firms showed great resilience last year, and helped boost the UK’s status as a world leader in tech – delivering jobs and huge benefits for our economy.
“In 2023, we are focusing on maintaining that lead by supporting startups, boosting digital skills and making this country an even more attractive destination to found, grow and invest in tech businesses.”