Signalling growing caution, venture financing for fintech firms fell in the second quarter (Q2), according to a report published on Wednesday by KPMG International and CB Insights.
Their latest quarterly fintech venture capital (VC) report indicates that investments in VC-backed fintech startups fell 49% in Q2 2016 from Q2 2015, and deal volume was down by about 12% over the same period.
Total investment in fintech companies, including both venture-backed and non-venture-backed companies, reached US$9.4 billion in Q2, the report says. Of this, VC-backed fintech companies raised US$2.5 billion in 195 deals.
“Despite VC backed funding to fintech decreasing in Q2, overall fintech funding remains on track to surpass 2015 levels”, says Ian Pollari, global co-leader of fintech at KPMG International, in a statement.
“Traditional financial institutions and banks of all sizes are realizing that the opportunities associated with fintech aren’t about who has the deepest pockets — and so they’re intensifying their innovation efforts,” he adds.
The report notes that so-called “mega-round” activity dropped in Q2, contributing to the overall decline in VC funding. During the quarter, there were just five deals in the US$50 million+ category in North America, and zero deals of this magnitude in Europe.
Nevertheless, VC-backed fintech companies are still on track to reach record levels of both investment and deal activity, the report says. The industry is on pace to hit US$14.8 billion worth of investment over more than 820 deals by the end of 2016, which would be record levels.
Overall, VC-backed startups raised US$1.3 billion in 97 deals in North America during Q2. In Europe, VC-backed fintech funding rose 22% from the previous quarter to US$369 million across 43 deals, while in Asia VC-backed fintech companies raised US$0.8 billion in 46 deals.
“The decline in fintech financing and deals is in line with what we’re seeing in the broader venture environment for startups, as VCs as well as crossover investors are pushing back harder on profitability and business model concerns,” says Anand Sanwal, CEO of CB Insights, in a statement. “Despite the funding drop, previously under-invested areas of fintech such as an insurance area are gaining strong momentum among venture investors across geographies.”
The report notes that so-called “InsurTech” is on the rise. VC investment in this niche reached US$1 billion across 47 deals in the first half of 2016.
“Although the overall VC investment in fintech is very positive, with InsurTech and Blockchain standing out as areas that continue to attract greater investment, the past quarter reflected a more cautious environment,” says Brian Hughes, partner with KPMG in the U.S., in a statement.
Traditional financial firms, Goldman Sachs, Citigroup and Banco Santander (or their venture arms) have invested in 25 VC-backed fintech companies over the past five quarters, the report notes. Other active banks include HSBC, JPMorgan Chase, and Mitsubishi UFJ Financial Group, it says.
“We are seeing more partnering by traditional financial services companies with fintechs to help develop new business models, while also enabling fintechs to expand their customer base and get the support they need to become sustainable,”
adds Hughes.
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