KPMG has released its Pulse of Fintech report for the first six months of 2023, providing a global analysis of fintech funding.

Total fintech funding in the EMEA region dropped considerably – from $27 billion in the second half of 2022 to $11 billion in the first half of 2023. This was due to investors increasing their focus on profitability in the wake of global macroeconomic uncertainty, rising interest rates, intense pressure on valuations, and a reduction in multiples, a new report by KPMG reveals.

Despite the slowdown, the region is expected to remain strong over the longer term once the market uncertainty lessens, the firm said. The UK attracted the majority of fintech funding in the EMEA region during the period, accounting for half of the region’s 10 largest deals, including the $3.1 billion buyout of data insights firm Wood Mackenzie by Veritas, a $602 million raise by AI-powered lending company Abound, and a $250 million raise by e-trading platform eToro.

Other countries that attracted large deals included France (Ledger – $493 million), Switzerland (Teylor – $299 million; Metaco – $250 million), Sweden (SignUp Software – $229 million), and Germany (Moonfare – $152 million).

At the end of the period, the European Commission released its long-awaited draft of the revised Payment Services Directive (PSD3), its proposals for a Payments Services Regulation (PSR) and a framework for financial data access. These ensure clear rights and obligations for managing customer data sharing beyond payment accounts. They are also likely to help boost interest and funding in the open banking and embedded finance space, as well as encouraging more collaboration between ecosystem participants, KPMG said.

In the first of 2023, the UK’s Joint Regulatory Oversight Committee also announced a framework for moving to the next phase of open banking, the firm continued. The UK passed too the Financial Services and Markets Act 2023. The Act includes a range of measures aimed at enhancing the UK’s leadership and competitiveness in the financial services and fintech spaces.

There is also an increasing interest in ESG-related fintech. In Europe, climate change has continued to be a top priority, with EU-based regulations, such as the Corporate Sustainability Reporting Directive, increasingly putting banks at the forefront of making certain their customers report on ESG compliance, KPMG continued. This focus is already spurring banks and corporates to consider their role in the process, with the integration of multiple sources of data, and changes that will be needed to ensure alignment.

In time, KPMG believes that this is likely to encourage interest in ESG-focused fintechs that can help companies and banks with identified gaps. Also, interest and funding in regtech continues to be keen, particularly in companies which are able to help financial institutions with KYC and AML obligations with digital onboarding, the detection of suspicious activity, and managing and updating of customer information. Historically, these activities have required a significant amount of manual effort. Given current macroeconomic pressures, financial institutions are becoming increasingly interested in how AI and automation can help them become more efficient, KPMG said.

Global level
On a global level, the first six months of 2023 were quite difficult for the global fintech market â€“ high levels of inflation, rising interest rates, the conflict between Russia and Ukraine, depressed valuations, and a lack of exits. Both total fintech funding and the number of fintech deals globally dropped from $63.2 billion across 2,885 deals in the second half of 2022 to $52.4 billion across 2,153 deals in the first half of 2023, the report reveals. Total funding in wealthtech was incredibly soft, which was expected given the range of factors creating uncertainty in the global market, within the fintech sector and beyond. The only $100 million+ deal occurred in the US – the most mature of the wealthtech markets globally, KPMG said.

Outlook
The firm expects an increasing focus in EMEA on embedded payments and embedded finance, catalysed by PSD3. It also believes that there will be growing attention to wealthtechs focused on democratising access to funding in asset classes once limited to private equity firms and other large-scale investors. KPMG also expects artificial intelligence and intelligent automation to be used increasingly across financial services, including in the insurance and wealth management sectors.  

Banks are likely to include more partnerships with fintechs, retailers, and other companies, for example by offering B2B embedded banking solutions, KPMG said. It also believes that UK crypo regulations will be introduced in an effort to position itself as a global crypto centre as well as growing M&A activity, particularly from corporates as inflation and interest rates stabilise. It expects the number of fintech companies to thin out as cash-strapped companies desperate for funding seek sales to other companies, KPMG continued.

“The factors that make the UK a strong financial services centre also hold true for crypto and digital assets – the legal and regulatory environment, the availability of skills, the quality of the universities, the language and time zone positioning,” John Hallsworth, partner, financial services, open finance and fintech at KPMG in the UK, said. 

“While the UK may not be first out of the blocks with its crypto and digital assets regulations – they’ll likely come into force in early 2024 – it is working to create the right regulatory environment to support a sustainable crypto and digital assets ecosystem and make it an attractive location to crypto sector participants, while also protecting consumers,” he added.