According to KPMG International’s The Pulse of Fintech, a quarterly report on global fintech investment, 2016 experienced a decline in the market with a 47.2% slide in fintech investment, this is after 2015’s record-setting US$46.7 billion in total global funding to fintech companies. The 2016 fintech funding total of $24.7B was still significant compared to pre-2015 investment levels.
The report showed that merger and acquisitions (M&A) as well as 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.
“While Fintech in South Africa, or across the African continent, still has not seen the level of investment in other global jurisdictions, there is an accelerating trend of fintech becoming the focus of investors, early stage (VC, angel and seed) and later stage (especially private equity),” says Joelene Pierce, a Partner in Financial Services for KPMG in South Africa.
Pierce also highlighted the huge amounts that South African banks, as well as the Insurance, Health and Wellbeing sectors spend on the IT sector. The focus on such ‘in-house’ spending on Fintech is huge and expectedly is in the form of enterprise development advances to start-ups and SMEs, developing Fintech products and services, as well as corporate venture capital type deals.
“The expectation is that the internal ‘corporate venturing’ type Fintech activities of the big banks and the large players in South African health and insurance sectors will have a knock-on effect on increasingly paving the way for pure private equity and venture capital investors to invest directly in Fintech ventures,” says Pierce.
Key 2016 annual highlights
· Total 2016 fintech funding declined to US$24.7B from US$46.7B in 2015, while deal activity dropped from 1,255 to 1,076.
· VC funding to fintech companies reached a record US$13.6B compared to US$12.7B in 2015, with 840 deals recorded.
· Overall fintech deal funding in Asia grew slightly year over year, reaching a new record high of US$8.6B invested compared to US$8.4B in 2015. 3 mega-rounds accounted for over half of this total.
· Both overall funding and VC funding to fintech declined in the US, with totals of US$12.8B and US$4.6B respectively.
· Overall European fintech funding dropped sharply in 2016, even though transaction volume remained quite resilient, reaching US$2.2B across 318 deals.
· Corporate VC investment in fintech rose for the seventh straight year, reaching 145 deals, US$8.5B in 2016.
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.
“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.”