High interest rates and geopolitical uncertainty combined to reduce investment in the financial technology (fintech) sector in the first half of 2024. 

 

On the other hand, factors like fintech’s continued importance to financial inclusion and equality, growth of customer demand for fintech solutions, and the improved efficiency of these firms suggest that the fundamentals remain sound. 

 

This leads to an all-important question: Is this reduction in investment only a bump in the road or does it spell fundamental trouble for the fintech industry?

 

In this article, we will consider whether you should invest in fintech and which fintech sub sectors to prioritise. We’ll cover:

 

  • The current state of fintech investment
  • Why invest in fintech? Top factors to consider
  • Which fintech sub sectors should you invest in?
  • What does the future hold for fintech?

 

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1. The current state of fintech investment

 

The first half of 2024 was not all rosy for fintech investment. 

 

Though fintech companies worldwide raised $15.9 billion across 1,566 deals, this was 19% less than what was raised in the preceding half year (H2, 2023), according to Innovate Finance, a body devoted to advancing the UK fintech sector.

 

Also, the average size of fintech deals in H1, 2024 – $10.2 million – was less than in 2022 and 2023.

 

Though using different figures, KPMG, the consulting firm, noticed the same drop. According to them, global investment in fintech (VC investment, private equity investments, mergers and acquisitions, buyouts, etc.) declined from $62.3 billion in H2, 2023 to $51.9 billion in H1, 2024. 

 

Innovate Finance attributed this fall in capital raising to uncertainty about upcoming elections (at the time), high interest rates (at the time), regional political instability, and macroeconomic challenges. 

 

However, they noted that while the quantity of investments reduced, the quality of investments increased as investors became more prudent, focusing on those with sustainable business models.

 

“While the volume of investments has decreased, the quality of investments has improved,” according to  Kaan Akin, Chief Commercial Officer at Tenity, an early-stage FinTech accelerator, quoted by Innovate Finance. “This suggests that companies are now delivering more substantial value compared to previous years. Overall, despite the slowdown, this shift towards more prudent investments could be a positive sign for the upcoming years, setting a stronger foundation for future growth in the fintech sector.”

 

Innovate Finance also noted a shift towards earlier-stage companies, compared to 2022 and 2023. The possible reasons are the reluctance of later-stage companies to raise capital at lower valuations and the need for early-stage companies to raise more cash rather than cut costs. 

 

KPMG also noted four key trends based on H1,2024 data: 

  • Matured and stable fintech markets attracted the largest deals
  • With only a few exceptions, investors are shying away from the largest deals
  • AI is drawing significant interest
  • RegTech continues to draw interest, especially in the Europe, Middle East, and Africa (EMEA) region. 

 

There are two more relevant facts according to US data analysed by Silicon Valley Bank (SVB): 

 

  • Fintech companies that are AI natives – startups built based on AI – are providing more value (per dollar invested) than those just incorporating AI into existing solutions, as seen below:

 

Source: Silicon Valley Bank 

 

  • Fewer mega deals: KPMG already noted that investors are shying away from the largest deals. SVB agrees: the number of mega deals ($200 million upwards) sponsored by Venture Capital firms is falling. 

 

Source: Silicon Valley Bank

 

 

2. Why invest in fintech? Top factors to consider

 

The fall in fintech investment in H1, 2024 should not be too much of a concern for asset owners and managers for at least three reasons. 

 

First, many of the reasons for the poor performance no longer hold or their effects have abated. 

 

The elections have already been held (especially in the US and UK) and there has not been any lingering uncertainty following them.

 

Similarly, we have already had two interest rate cuts by the US Fed even as they seem to now have a firm control on inflation. The Bank of England and the European Central Bank also cut interest rates in November.

 

Of course, there has not been a lasting solution to the major regional political uncertainties ( Russia-Ukraine and Israel-Palestine) but some will consider the election of Donald Trump a great sign (though it remains to be seen how that will pan out). 

 

Secondly, even though fintech investment slowed down in H1,2024, there were still some positive aspects. 

 

Innovate Finance mentioned that the quality of investment is increasing and entrepreneurs in the fintech space are delivering greater value through fintech innovation. 

 

KPMG also mentioned how stable and mature markets like the Americas and Asia-Pacific regions recorded more deals in H1,2024 compared to H2,2023. The growing interest in AI and RegTech is another significant tailwind.

 

Similarly, SVB pointed out that native AIs have been delivering great value  

 

Third, despite the fall in investment and the number of deals, many of the sound fundamentals of the fintech industry remain. This means that as liquidity improves (following the conclusion of the US election and lower interest rates), fintech investment can be expected to pick up again. 

 

So, what are these fundamentals that should make you invest in fintech? 

 

Impact on financial inclusion

 

The percentage of people who had a bank account increased from 51% in 2001 to 76% in 2021, according to a World Bank report.

 

What was responsible for this shift in recent years? The answer is simple: fintech. Digital payments, mobile money, credit access, democratisation of investment management, and access to insurance are five fintech developments that have increased the pace of financial inclusion, according to the CFA Institute. 

 

Given this connection, fintech will continue to remain important as long as financial inclusion is an important global aim. 

 

But is financial inclusion still a global aim? Indeed. “Financial inclusion is positioned prominently as an enabler of other developmental goals in the 2030 Sustainable Development Goals, where it is featured as a target in eight of the seventeen goals,” according to the UN Capital Development Fund (UNCDF). 

 

As of 2022, the World Bank reported that about 1.4 billion people remain unbanked. Though fintech cannot overcome all the challenges to financial inclusion, it will continue to play a major part in its progress. 

 

Increasing efficiency

 

The more cost-efficient companies in an industry become, the more they can expand their net income. This will result in higher returns for investors and as we know, investors’ funds run after high returns. 

 

In this regard, it is a tailwind that fintech companies are improving their Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) margin and extending their cash runaway (the number of months until the cash runs out), according to US data analysed by SVB. 

 

EBITDA margins are at their highest level since 2019. More importantly, the share of fintech companies with improving EBITDA margins is also at the highest since 2019.   

 

Regarding cash runaway, notice that the percentage of companies extending their cash to 48+ months is higher in 2024 than in 2019, 2020, 2022, and 2023. 


 

Customer demand driving growth

 

Fintech provides at least five benefits to customers (especially when compared to traditional financial institutions), according to Kalina Bryant, an advisor for early-stage startups and VC firms in Silicon Valley: enhanced accessibility, cost savings, streamlined financial management, personalised financial services, and innovative payment solutions. 

 

It is no surprise then that strong customer demand is a key growth driver, according to a survey by the World Economic Forum (WEF). They noted that 51% of surveyed fintech firms said it was a major supporting factor, more important than the availability of a skilled workforce, favourable regulatory environment, funding environment, and digital and financial literacy.

 

3. Which fintech sub sectors should you invest in?

 

“Should I invest in fintech?” Based on the fundamentals and favourable changes in macroeconomic conditions, the answer seems to be “yes.”

 

But knowing how to invest in fintech can be a little bit tricky. 

 

One way to handle it is to prioritise those fintech sub sectors that are especially thriving. By doing this, you can increase ROI and become more confident in your investment decisions. 

 

So, which fintech domain is the largest in terms of investment? 

 

For the 2023 final year, payments (payment processing), financial management solutions (invoicing, tax, accounting), and wealth management (robo-advisors, new brokerage firms, and investing platforms providing access to capital markets, etc.) were the top three sub sectors  in terms of investment value, according to data provided by Deal Room, a company providing data and intelligence on startups and tech ecosystems. 

 

Has there been any significant changes in 2024? Not really!

 

“At a sector level, payments continued to draw the largest share of fintech funding globally, attracting $21.4 billion in H1’24,” reported KPMG. 

 

However, in terms of growth (investment value in H1,2024 compared to H2,2023), RegTech (fintech solutions helping with regulatory compliance) led. It was the only fintech sub sector where investment in H1,2024 exceeded that of H2,2023. 

 

If we zoom in on the US (which accounts for 45.6% of global fintech investment according to Innovate Finance) we notice the following dynamics from data provided by SVB: 

 

  • Deal count: In terms of the number of deals, cryptocurrencies/blockchain (decentralised finance, cryptocurrency exchange, and other uses of blockchain technology), personal finance (savings, insurance, budgeting), and financial B2B software (mobile recharges, payment gateways, digital wallets) are the top three, as seen below.  

 

  • Deal value: As seen above, personal finance, cryptocurrencies/blockchain, and financial B2B software also lead the way in terms of deal value (though in a different order). 

 

This shows that, at least in the US, cryptocurrencies/blockchain, personal finance, and financial B2B software are where investors are focusing their attention. 

 

If you care about specific markets, you may want to know which ones are the top destinations for fintech investment. 

 

As said above, the US is still the darling of fintech investors. The UK, India, and China are the next three. Germany, Brazil, Singapore, Netherlands, Australia, and Hong Kong complete the top 10 fintech hubs.

 

 

4. What does the future hold for fintech?

 

Since past performance does not guarantee future performance, perhaps a better way to decide how to invest in fintech is to consider what factors will drive its immediate future and position yourself accordingly. 

 

Four themes will become even more relevant to the next generation of fintech companies, according to Boston Consulting Group (BCG), a management consulting firm: 

 

  • Embedded finance: Embedded finance is “the seamless integration of digital banking, along with other financial products and services, into nonfinancial companies’ platforms or applications,” according to PwC, a management consulting firm. Both fintech firms and traditional banks are embracing embedded finance and BCG expects it to grow to a $230 billion market by 2030. 

 

  • Connected commerce: This involves financial institutions showing personalised and tailored ads to customers and earning revenue when their customers purchase goods and services from the advertisers (usually the bank’s enterprise and SMB customers). 

 

  • Open banking: Open banking is “a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data,” according to Investopedia, a financial education platform. 

 

Its potential lies in how it can foster cooperation between traditional players in the financial sector and fintech firms, leading to enhanced financial services for customers. Those fintech startups that can leverage open banking can gain a competitive advantage. 

 

  • Generative AI: Both Innovate Finance and KPMG have mentioned the growing interest in Gen AI in 2024. BCG expects it to deliver both productivity gains and product innovation (where its high growth potential lies) to fintech firms in the near term. 

 

“Fintechs view artificial intelligence as being the most relevant topic for the fintech industry development over the next five years,” according to the World Economic Forum, quoted above. 


 

The importance of these themes can be confirmed by a survey conducted by WEF (see below). AI, open banking, and embedded finance are some of the top  topics that fintechs believe will be most relevant for fintech industry development in the next five years. 

 

Though these are not new technologies, fintech startups that can better adapt to them can have a competitive advantage over others and become the destination for investors’ funds. 

 

To summarise, when considering how to invest in fintech, you can: 

 

  • Choose to invest in sub sectors that are currently driving investment (payments and reg tech globally, crypto/blockchain, personal finance and financial B2B software in the US).

 

  • Position yourself in companies that will benefit from the themes driving the future of fintech (embedded finance, open banking, connected commerce, and gen AI).

 

  • Prioritise sub sectors investors have been comfortable in over the years (payments, wealth management, insurance (InsurTech), wealth management, financial management solutions, etc.). 

 

Of course, before making these decisions, you can benefit from learning what other investment professionals (including asset owners and asset managers) think about the fintech sector at large and its sub sectors  in particular. 

 

At cio investment club, we seek to make this learning process easier by connecting you with other investment professionals. We also organise exclusive roundtables and investment breakfasts where face-to-face interactions can take place (and even lead to partnerships). 

 

Do you want to benefit from an investment community that will make you a better investor? Register today to become a part of the cio investment club.

 

Takeaways

  • Despite reduced investments, the fintech sector's foundation, like financial inclusion and customer demand, still drives long-term potential.

 

  • Payments continue to lead in total investment value while RegTech boasts of the largest growth in investment from H2,2023 to H1,2024.

 

  • In the US, crypto/blockchain, personal finance, and financial B2B software are the main destinations for fintech investment.

 

  • Investors should focus on fintech sub sectors with sustainable growth and leverage emerging themes like embedded finance, open banking, and generative AI.

 

 

 

 

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