KPMG’s The Pulse of Fintech is a biannual report showcasing key activities and trends within the fintech market globally.
By Ian Pollari and Anton Ruddenklau | KPMG
After a record-setting 2018, the first half of 2019 got off to a quiet start for fintech investment globally—mirroring a trend seen in the broader VC market. The steep drop-off reflected the lack of blockbuster deals, such as the $14 billion raised by Ant Financial or Vantiv’s acquisition of Worldpay for $12.9 billion, during the first half of last year. Global uncertainty, regulatory changes in China, and the US-China trade tensions likely also contributed to the decline.
Fintech investment in Asia Pacific plummeted during the first half of 2019. Nevertheless, despite the ongoing concerns around Brexit, it got off to a very strong start in Europe. While well off the pace required to match 2018’s massive in- vestment record, fintech investment in the Americas was also very good during the first half of this year.
After losing some of their luster in 2018, blockchain-based cryptocurrencies got a fresh breath of life in H1’19 with Facebook’s announcement of Libra, expected to launch in 2020. The new cryptocurrency is being collectively driven by the Libra Association, a consortium including organizations like Visa, Mastercard, Uber and Andreessen Horowitz.
While payments continued to draw the most significant attention from fin- tech investors across most jurisdictions, H1’19 also saw the continued maturation of the fintech industry as a whole and the broadening of its definition. Areas like wealth-tech, prop-tech and reg-tech grew substantially on the radar of investors.
We discuss these trends and other issues in this edition of the Pulse of Fintech, in addition to delving into key questions permeating the fintech market today, including:
- What is driving the strength of Europe’s fintech market?
- What are wealth-tech and prop-tech—and how are they evolving into key areas of investment?
- How is cross-border investment propelling the fintech industry forward?
- What does the Facebook Libra announcement mean for cryptocurrencies?
- How are regulatory changes in China impacting fintech investment?
Number of deals down as investors become more discerning
Reflecting deals seen in the broader investment market, global fintech investors showed a preference toward a smaller number of larger deals during H1’19, particularly in the more mature markets—such as the US, Germany, the UK and fintech verticals—like payments and lending. In these sectors, investors have gained a better sense of the vertical winners and the emerging platforms that will be sustainable, and concentrated their investments accordingly. The next 12 to 24 months will be a critical period for many platforms that haven’t been able to achieve scale; consolidation is likely to increase as they look for ways to survive and gain market share.
Fintech investment in the Americas remains strong and diverse
The Americas saw a great start to the year in terms of fintech investment. While well off pace to match 2018’s massive investment high, investment was very strong compared to all years previous. While the US dominated the fintech investment space, Canada and Latin America also saw big deals in H1’19. Three enormous M&A deals were also announced in H1’19, including Fidelity’s acquisition of Worldpay ($43 billion), Fiserv’s acquisition of First Data ($22 billion), and the merger of Global Payments with Total System Services ($21.5 billion). Should these deals close before the end of the year, the US will easily set a new record for total fintech investment.
Reg-tech industry showing normal growth volatility after strong 2018
While there was a boom in reg-tech investment in 2018, in H1’19, both the number of deals and total funding dropped considerably. This highlights a distinct trend of peaks and valleys seen in reg-tech investment since 2014. Given regulations like GDPR, PSD2 and MiFID II/ MIFIR, reg-tech will likely continue to be a major focus for investment for the foreseeable future.
Globally, a number of financial institutions are investing in reg-tech in order to fill compliance gaps, reduce the cost of compliance, integrate and get ahead of new requirements, and even detect enterprise risks before the regulators. As digitalization, machine learning and AI reshape the financial services landscape, business models and risks are also becoming more complex— which only increases MMR risks. Over the next few years, there will likely be rigorous investment in building out regtech solutions focused on MRM controls, validation and governance.
While much of the reg-tech investment focus has been driven from the EU, activity in Asia Pacific is increasing. Singapore’s FinTech Association recently launched a SFA reg-tech sub-commit- tee to promote reg-tech innovation and adoption of technologies and to work with other associations (e.g. Hong Kong (SAR), China, Japan) to promote the application of reg-tech. In SAR, the HKMA continues to manage a fintech sandbox to help drive innovation, while the Securities and Futures Commission is in the process of assessing the potential for reg-tech. Both China and Australia are also zoning in on reg-tech, with the China Securities Regulatory Commission pushing for the adoption of reg-tech to help strengthen controls over fintech usage, while the Australian Securities and Investments Commission is funding studies to investigate how NPL could help detect misconduct and improve regulation.
The slow start for fintech in early 2019 must be put in context. Not only are there multibillion-dollar deals inked but yet to close, but also, the current pace of deal value, should it be maintained, would result in 2019 being the second-most investment-rich year of the decade by far. The volume diminution is more a sign of inflated prices in VC taking a toll on overall activity, particularly at the early stage, so it is more a product of supply and demand rather than an overt signal of a winding-down cycle.
After a blockbuster pair of quarters for fintech in 2018, the first quarter of 2019 proved to be a tad more sedate, in terms of deal value recorded. Q2 was even quieter. However, together they add up to another very strong year for fintech capital investment. Interestingly, deal volume recorded another lackluster slide, capping off five straight quarters of diminishing counts. VC activity, or rather lack thereof, plays a large role in the decline. This suggests that the industry as a whole may be cycling through a typical settling period as more mature M&A dominates investment activity while the venture pipeline refills.
*Pollari is Global Co-leader, KPMG Fintech practice at KPMG International and is passionate about technology and its application to financial services (Fintech). This led to him authoring Australia’s first local study into its potential opportunities. Ruddenklau is Global Co-Leader of Fintech for KPMG International and a Partner and the Head of Digital & Innovation for Financial Services in KPMG in the UK.
