After 2015’s record-setting US$46.7 billion in total global funding to fintech companies, 2016 experienced a decline in the market with a 47.2% slide in fintech investment, according to KPMG International’s quarterly report on global fintech investment. The 2016 fintech funding total of $24.7B was still significant compared to pre-2015 investment levels.
Merger and acquisitions (M&A) and private equity (PE) fintech deals dropped considerably in 2016, while venture capital (VC) investment reached a new high of US$13.6B compared to US$12.7B in 2015. Three Chinese mega-rounds buoyed global fintech funding significantly, led by the Q2’16 Ant Financial record-setting US$4.5 B funding round.
While VC investment softened somewhat in the second half of 2016 due to a decline in mega-rounds, the year ended on a positive note, with US$2B invested in Q4’16 across 200 deals, compared to US$1.9B across 176 deals during the previous quarter.
“Two key trends in 2016 were collaboration, with fintechs learning to work with the big banks, and the rise of China. China has become a fintech powerhouse, both in investment flow and deal activity,” commented Warren Mead, Global Co-Leader of Fintech, KPMG International and Partner, KPMG in the UK. “Looking ahead to 2017, with the implementation of the revised Payment Services Directive (PSD2) rapidly approaching in Europe, and growing pressure for real-time payments and open banking all over the world, there will no doubt be some exciting developments coming down the pipe.”
Key India Highlights
VC investment in India saw a significant decline in 2016, with just $216 million in investment, compared to $1.6 billion the previous year. This decrease highlights the impact a lack of mega-deals can have on a country, as actual deal volumes in India remained steady over the same period. Despite the decline, India appears to be a key focus of VC investors in Asia. Q4’16 demonetization efforts resulted in an increase in transactions for both payments companies and mobile wallet providers. This trend will be one to watch in Q1’17 and Q2’17, as it may spark additional interest from investors
Corporate interest in fintech is also expected to increase in India over the next year. Already, many of India’s banks and insurance companies have created innovation funds to invest in fintechs or set aside funds for collaboration
As India continues to push its digital currency initiatives, there are plenty of opportunities for novel product development within the space, as a number of entrepreneurs look to utilize blockchain protocols or present better use cases for consumers looking to gain exposure to bitcoin
Decline in M&A speaks to 2015 high rather than 2016 low
During 2016, there was a marked decline in fintech-related M&A activity around the world, from US$34B to US$11Bn. This decline is more attributable to 2014 and 2015 being incredibly strong years for fintech M&A activity rather than 2016 being an abnormally weak year. The 236 fintech M&A deals executed globally in 2016 came second only to the 313 deals that closed in 2015. Among the most exciting M&A deals in 2016 were the US$725 million purchase of OptionsHouse by E*Trade Financial in Q3’16 as well as payment processor TransFirst’s US$2.35 billion acquisition by Total System Services in Q2’16.
Blockchain investment reaches a tipping point
Global venture investment in bitcoin and blockchain technologies reached a high of US$543.6M in 2016, compared to US$441M in 2015; however, the deceleration in deal count of 132 versus 191 deals closed in 2015 likely signifies that some initial hype in blockchain is fading and greater evidence of robust applications will be required for future investment.
Outlook strong for 2017
Insurtech is predicted to continue the strong growth witnessed in 2016 as the insurance industry plays catch-up with the innovations seen in the banking industry. Growing applications of innovative technologies like wearables, the Internet of Things and artificial intelligence to the insurance industry are also likely to spur further investment. There is also likely to be increasing participation of tech giants in the fintech sector. Already companies like China-based Alibaba Group are targeting promising fintech companies as a means to expand globally.