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VC investment in fintech remains robust as M&A activity stalls

While overall global fintech funding fell during the first half of 2020, with US$25.6bn of investment globally across 1,221 deals, corporate deals are driving continued strength in VC activity, according to the Pulse of Fintech H1’20, a bi-annual report on global fintech investment trends from KPMG International.

A sharp drop in M&A investment drove most of the decline. During H1’20, M&A accounted for just US$4bn of fintech investment (compared to US$85.7bn in H2’19), including the US$1.3bn reverse merger of Open Lending. The stalled M&A reflects both a general slowdown in deal activity and investors pressing pause on major deals in order to re-consider valuations and risk appetite given COVID-19.

Despite global uncertainty, VC investment was strong in all regions of the world - and is on track to surpass previous annual record highs should the trend continue. In H1’20, VC investment in fintech accounted for US$20bn, including US$9.3bn in the Americas, US$6.7bn in Asia, and US$4bn in EMEA. 

Indonesia-based Gojek raised US$3bn in the largest VC deal of the quarter - and the largest fintech deal overall. Gojek competitor Grab accounted for the second largest fintech VC deal (US$886m), followed by Stripe (US$850m). Late-stage deals accounted for a significant proportion of VC investment as mature fintechs continued to attract large funding rounds.

Given the long lead times for deal-making, many H1’20 deals were initiated in late 2019. COVID-19 saw new deal activity slow dramatically, except in high-priority sectors like payments. Despite the pandemic, investor interest in platform businesses remained incredibly strong in H1’20, particularly in less mature fintech markets. Platform business continued to see significant investment from investors and large techs.

“The Gojek deal is a prime example of how the lines of fintech are blurring," said Ian Pollari, Global Fintech co-leader at KPMG International. "The Indonesia-based platform provider, which also has a digital payment offering, attracted funding from tech giants Facebook, PayPal, Google and Tencent. The intermingling of big tech platform providers and fintech is only expected to grow as big techs work globally to extend their market reach and value propositions – particularly in markets like Southeast Asia.”

2020 fintech highlights

Global fintech investment is well behind 2019’s total investment of US$150.4bn. At mid-year, total fintech investment globally is US$25.6bn. The Americas accounted for the largest share of total fintech investment at mid-year, with US$12.9bn investment. APAC saw US$8.1bn in total fintech investment during H1’20, while EMEA saw US$4.6bn in fintech investment.

The Americas and EMEA are currently on track to see a new record annual high of VC investment in fintech. At the end of H1’20, the Americas had attracted US$9.3bn in VC investment, Asia had attracted US$6.7bn, and EMEA had attracted US$4bn.

Corporate VC participating investment remained very strong, accounting for US$12.2bn in fintech investment globally. The US saw a record in VC deal value with corporate participation well over US$2.4bn in Q1 2020; the following quarter nearly matched that same amount.

M&A activity dropped in all regions of the world - a sharp decline due to the mega M&A activity seen during 2018 and 2019. During H1’20, global M&A deals accounted for US$4bn globally, compared to US$85.7bn in H2’19. 

Global investment in cybersecurity flew past 2019’s record high of US$592.3m, reaching US$870.8m. 

US sees lion’s share of fintech investment in Americas

The Americas saw a steep decline in fintech funding, with US$12.9bn of investment in H1’20 compared to US$43.3bn in H2’20. Plummeting M&A investment was responsible for the decline as VC investment in the region was on record pace - with US$9.3bn raised by the end of H1’20. The US accounted for the vast majority of both total fintech investment in the Americas (US$11.9bn) and VC investment (US$8.6bn) - with large deals including the US$1.3bn reverse merger of Open Lending, an US$850m raise by Stripe, the US$700m acquisition of RDC, and a US$700m raise by Chime.

The payments space was the hottest sector for VC investment in the US. In addition to Stripe and Chime, B2B payments company AvidXchange raised US$388m. Late stage companies in other fintech sub-verticals also raised large megarounds, including wealthtech Robinhood (US$430m) which raised an additional US$200m in a separate round in mid-August 2020, cryptocurrency firm Bakkt (US$300m), and insurtech Duck Creek Technologies (US$230m).

Challenger banks raise big VC rounds in Europe

Total fintech investment in EMEA declined significantly, given the lack of mega M&A deals. During H1’20, the region saw US$4.6bn in fintech investment. VC investment in fintech remained strong in H1’20, accounting for US$4bn in investment.

During H1’20, challenger banks attracted five of the 10 largest deals in EMEA, including Germany-based N26 (US$570m), UK-based Revolut (US$500m), Sweden-based Klarna (US$200m), UK-based Starling Bank (US$123m), and France-based Qonto (US$116m).

Southeast Asia becomes hotspot for fintech activity

APAC saw US$8.1bn in total fintech investment during H1’20, led by the US$3bn funding round by Indonesia-based Gojek, an US$886m raise by Gojek’s main competitor - Singapore-based Grab, and a US$398m raise by India-based Navi Technologies. Fintech investment in APAC was quite diverse from a regional perspective this quarter. In addition to Indonesia, Singapore and India, Japan (Paidy: US$251m), South Korean (KSNET: US$237m), and Australia (Airwallex: US$160m, Judo Bank: US$147m) also saw large fintech deals. Fintech investment in China remained suppressed, falling to a multi-quarter low in Q2’20.

Government regulatory efforts were a very strong trend in APAC. During H2’20, Australia re-opened submissions to its Select Committee on Financial Technology and Regulatory Technology in order to understand how COVID-19 has affected the fintech sector, while Singapore introduced a licensing program for digital asset exchanges and platforms and Hong Kong (SAR) introduced an ‘opt-in’ licensing program for digital assets exchanges.

Corporate fintech investment robust in face of COVID-19

Corporate investment in fintech remained very strong in H1’20, accounting for US$12.2bn in investment across participating deals globally. The US was particularly notable as it saw a record high of over US$2.4bn in corporate investment in Q1’20 - a number almost matched in Q2’20. Corporate investment is expected to remain very strong heading into H2’20, in part due to the strategic nature of investments driven by corporates making investments in digital channels and products in order to serve their customers better in the COVID-19 era.

Accelerated digital trends will shape fintech’s future

COVID-19 will remain key driver of change for fintech investment heading into H2’20 given the strong acceleration of digital trends - such as the use of contactless payments and the demand for and use of digital service models. The ongoing acceleration of digital trends will drive fintech investment not only in direct fintech solutions, but also in related enabling technologies - such as cybersecurity, fraud prevention and digital identity management. Platform businesses will also continue to be a hot ticket for investors, particularly in less mature jurisdictions.

“Over the remainder of 2020, we will likely see investors continuing to focus on late stage deals and safe bets given the current uncertainty," said Anton Ruddenklau, Global Fintech co-leader at KPMG International. "This will likely create challenges for less mature fintechs who could find themselves running out of cash and struggling to raise additional funding. In H2’20, there will likely be an increasing number of opportunistic investments by corporates and PE firms look for good deals.”

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