After 2015’s record-setting $46.7 billion in total global funding to fintech companies, 2016 experienced a decline in the market, with a 47.2-percent downslide in fintech investment, according to KPMG International’s quarterly report on global fintech investment. The 2016 fintech funding total of $24.7 billion is still significant compared to pre-2015 investment levels.
VC investment in India saw a significant decline in 2016, with just $216 million in investment, compared to $1.6 billion the previous year. Despite the decline, India appears to be a key focus of VC investors in Asia, says the report. The demonetisation efforts of 4Q16 resulted in an increase in transactions for both payments companies and mobile wallet providers. This trend will be one to watch out for in 1Q17 and 2Q17, 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 fintech 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 utilise blockchain protocols or present better use cases for consumers looking to gain exposure to bitcoin.
Neha Punater, Head of Fintech, KPMG in India, said, “With the demonetisation effort that started in 4Q16 in India, there has been a big increase in the number of transactions managed by both payments companies and wallet providers. As this effort continues, we should see momentum grow for digital platforms and fintech solutions.”
A sneak peek at the global market
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 $13.6 billion as compared to $12.7 billion in 2015. Three Chinese mega-rounds buoyed global fintech funding significantly, led by the 2Q16 Ant Financial record-setting $4.5 billion 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 $2 billion invested in 4Q16 across 200 deals, compared to $1.9 billion across 176 deals during the previous quarter.
“Two key trends in 2016 were collaboration, with fintech 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 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.”
Total 2016 fintech funding declined to $24.7 billion from $46.7 billion in 2015, while deal activity dropped from 1,255 to 1,076. VC funding to fintech companies reached a record $13.6 billion compared to $12.7 billion in 2015, with 840 deals recorded. Overall, fintech deal funding in Asia grew slightly year over year, reaching a new record high of $8.6 billion invested compared to $8.4 billion in 2015. Three mega-rounds accounted for over half of this total.
Both overall funding and VC funding to fintech companies declined in the US, with totals of $12.8 billion and $4.6 billion respectively. Overall, European fintech funding dropped sharply in 2016, even though transaction volume remained quite resilient, reaching $2.2 billion across 318 deals. Corporate VC investment in fintech rose for the seventh straight year, reaching 145 deals, $8.5 billion in 2016.
During 2016, there was a marked decline in fintech-related M&A activity around the world, from $34 billion to $11 billion. 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.
“2017 is shaping up to be a pivotal year for fintech globally,” said Brian Hughes, Co-Leader, KPMG Enterprise Innovative Startups Network, and National Co-Lead Partner, KPMG Venture Capital Practice, KPMG in the US. “Because valuations have corrected, the market has set up a perfect storm for IPOs and M&A to happen in 2017. An increasing number of exits will likely only stimulate demand for new investments thanks to the dry powder already present in the market.”