Fintech Sector Shows Record-Breaking VC Investment This Year
During the first half of 2021, VC investment in fintech has grown tremendously in most regions of the world. As we head into the second half of the year, this extraordinary momentum is expected to continue, predicts KPMG’s Pulse of Fintech report in H1’21.
Overall global fintech funding across M&A, PE, and VC deals soared to a new high, according to the bi-annual report on fintech investment trends. It notes that global fintech investment reached US$98 billion across 2,456 deals in H1’21 – far outpacing last year’s annual total of $121.5 billion across 3,520 deals.
Fintech valuations remained very high in H1’21 as investors continued to see the space as attractive and well-performing. This likely drove the explosion of unicorn births in the first half of 2021, said the report.
Under pressure to increase the velocity of their digital transformation and to enhance their digital capabilities, corporates were particularly active in venture deals, participating in close to $21 billion in investment over nearly 600 deals globally, with many realizing its quicker to do so by partnering with, investing in, or acquiring fintechs.
Region-wise, total fintech investment in the Americas was very robust with over US$51 billion in investment across 1,188 deals. The EMEA region saw US$39.1 billion in fintech investment in H1’21.
Fintech investment in the Asia-Pacific region continued at a more moderate pace, reaching $7.5 billion across 467 deals, compared to $13.4 billion across 714 deals during all of 2020.
However, India almost matched its total fintech investment in 2020, with $2 billion in investment in H1’21, the study said with digital banking was a big play in India. But with a unique model compared to other jurisdictions in the regions – with digital banks acting primarily as SaaS providers and regulatory responsibility remaining with bank partners
Early fintech leaders in India have continued to expand their business models into adjacencies in order to bring their customers more value, such as payments players acquiring insurtechs. Insurtech is a growing area of interest for investors in India; in H1’21, several insurtechs raised mid-sized VC or PE funding rounds.
“Exits in India are going to increase, both in terms of IPOs and in terms of acquisitions. On the M&A front, fintechs could be targeted by banks, larger fintechs or even a fintech services conglomerate,” says Sanjay Doshi, Partner and Head – Financial Services Advisory, KPMG in India.
“Over the next 12 months, we expect leading fintech unicorns trying to tap into the strong capital market by looking at an IPO. Banks are also keen to partner with Fintechs especially Neo Banks and Wealthtech platforms,” he adds.
Globally, M&A deals continued at a very healthy pace, accounting for $40.7 billion across 353 deals in H1’21, compared to $74 billion across 502 deals during all of 2020
Late-stage venture valuations more than doubled year-over-year, with global median pre-money valuations for late stage deals rising from $135 million in 2020 to $325 million at the end of H1’21. The report also observed that PE firms embraced the fintech space in H1’21, contributing $5 billion in investment to fintech— surpassing the previous annual high of $4.7 billion seen in 2018.
KPMG’s prediction for the rest of the year includes:
Cybersecurity will likely gain even greater prominence
Given the rise in digital transactions and the subsequent rise in cyber attacks and ransomware, cybersecurity is a focus area for investors, particularly corporates. In addition to threat security, fraud management, KYC, and password-less security will gain increasing attention from investors.
SPACs could steal the spotlight
While IPO exit activity is expected to be strong in H2’21, we could see SPAC mergers stealing the limelight in H2’21 — particularly if Grab’s $40 billion SPAC merger goes ahead. We will likely also see a proliferation of US SPACs looking to EMEA and the Asia-Pacific region for targets.
B2B services will gain attention across fintech sub-sectors
We’ll likely see B2B services such as banking-as-a-service, gain even more ground on the investor radar — not only in the payments space, but also in areas like insurtech, wealthtech, and regtech. We expect to see embedded finance continue to gain traction as organizations strive to integrate financial services with other environments.
Partnerships will be embraced by big techs and fintechs
Partnership models will be a critical means for companies looking to expand their service offerings. We’ll likely see partnerships emerging across the fintech sector — from wealthtech to insurtech — and involving a range of participants from the big techs and platform players to financial institutions and larger fintechs looking to add to their core services.
Crypto will be a hot focus for investors
H1’21 saw an explosion of activity in the blockchain and crypto space. We’ll likely see this trend continue, with focus stretching across the crypto ecosystem — from cryptocurrencies and trading platforms to NFTs, alternative asset trading, and support structures. The space will also see a more diverse range of investors considering investments in the space.
M&A activity will continue to surge
M&A activity will likely grow considerably as corporate look to expand their capabilities and offerings and fintechs look to scale. Cross-border activity will likely also be robust as fintechs look to become global or regional leaders. This could also drive the return of major mega M&A transactions.