FinTech has revolutionized the financial industry and presents incredible benefits for individuals, businesses, and the economy as a whole. Startups in this area have significantly increased accessibility to financial services, especially for underserved or unbanked populations – something we have seen a great deal with FinTech startups serving Latin America.
Because of its transformative impact, FinTech has been a hot spot for venture capital investment. However, the past few years have been challenging for startups across the board in the wake of the economic downturn.
Let’s look at the current state of FinTech investment globally, what aspects of FinTech are continuing to attract investment, which regulations are impacting this industry, and what the future might look like for this sector.
A Look at the Numbers
FinTech has long been a darling of VC firms, with money flowing into this sector. A KPMG report looking at FinTech funding in 2021 showed global FinTech investment at US$210 billion across a record 5,684 deals that year. This was up from $125 billion across 3,674 deals in 2020.
However, since the economic downturn really hit in 2022, funding in this sector has been impacted. VC funding of FinTech startups dropped globally by 49% year over year to US$23 billion in the first half of 2023 according to S&P Global Market Intelligence data. This data also points to a continued drop in the deal count, with FinTech funding rounds in H1 2023 coming in at 1,178, a 64% drop from H1 2022. The report also notes that there were only nine mega funding rounds (over US$100 million) in Q2 2023, which is down from 23 in Q1 2023 and 55 in Q2 2022.
Current Segments of Interest for Investors
While funding has slowed down, it has certainly not stopped. An article in FinTech Nexus reports that in 2022 the global FinTech market was valued at US$133.84 billion and is projected to reach US$556.58 billion by 2030. With amazing projected growth, below is a look at some areas within the FinTech sector that are particularly attractive to investors and what to watch for right now.
The S&P Global Market Intelligence report points out that venture capital investors are specifically looking at FinTech companies with AI-led models. Their data shows that in H1 2023, over 60 funding rounds totaling US$1 billion included FinTech startups employing AI technology. The vast majority of these are in seed-to-growth stages.
FinTech Nexus also highlights some areas of FinTech to pay attention to moving forward. Those include contactless payments, with a rapidly growing number of consumers preferring to pay via phone or wireless device. Other areas highlighted include online lending, buy now pay later (BNPL), regulation technology (RegTech), and blockchain technology.
Navigating Regulations
Regulatory concerns are probably the most complicated and complex issue facing startups in the FinTech space. These regulations can be incredibly difficult to navigate, as they vary widely based on where you are doing business. In the U.S., FinTech founders should be acutely aware of the sweeping regulations that govern this industry.
A previous article on Foley Ignite points to the trust involved in handling other people’s money and the strict government regulations that hold financial institutions accountable.
In the U.S. alone, federal regulations include the Gramm-Leach Bliley Act, know-your-customer (KYC) and anti-money laundering (AML) requirements, securities laws, money transmitter regulations, and the Fair Credit Reporting Act. There are also state-level regulations to consider such as data privacy and security laws that vary widely from state to state.
As FinTech startups look to investors for funding, they should ensure that they have an in-depth understanding of all state and federal laws governing this sector and that they are fully in compliance. This is one area where legal counsel is essential.
In an article published by Latinvex last year, titled Latin America’s Investment Boom and the Pitfalls of American Jurisdiction, I specifically discussed the far-reaching arms of American and European jurisdictions in enforcing their laws and regulations even beyond borders. Thus, this topic deserves special attention from both investors and startups.
Expectations for the Future
Another report from S&P Global Market Intelligence released in April noted that there could be a geographical rotation happening as VC investors look for parts of the world that are underbanked i.e., areas where traditional finance is not readily available. We mentioned Latin America earlier and the transformative impact FinTech has had in this region. This is in large part because of how underserved this region is in terms of banking.
Investment in Latin American FinTech companies has taken a hit over the past two years, but many of these startups have been successful in bringing financial services and cutting-edge technology to a very underserved population, and investors have certainly taken notice. VC investors could be looking to find the next area where startups can duplicate these efforts.
S&P also sees payments orchestration, cross-border payments, sweep networks providing access to an array of banking relationships, and revenue financing as potential FinTech models that will be attracting investors, as well as middleware players inhabiting the embedded finance space.
While investment in the FinTech sector has been recently reduced, there is still incredible potential for this technology to continue to revolutionize and disrupt the financial services industry. As advances continue in this area, investors will certainly once again turn their attention to those FinTech startups leading the way.
