Total UK fintech investment dropped to $9.6 billion in the first half of 2022, down almost threefold from $27.8 billion in the same period in 2021, according to KPMG’s Pulse of Fintech, a biannual report on fintech investment trends.
Last year’s investment total was strengthened significantly by the size of many deals, including the $14.8 billion Refinitiv agreement in January 2021. Even after adjusting for outliers, such as the Refinitiv deal, the drop in UK fintech investment is still well above the $3.8 billion spent in H1 2019.
Susanne Chishti, CEO of Fintech Circle, Investor & Board Member, explains that “the reason for the decline in UK fintech investments this year is driven by the worsening economic environment including the highest inflation in the UK since 40 years. Many investors don’t invest at the moment as they wait for the ‘Lehman Brothers moment’ and therefore hold more cash than usual to invest at lower valuations later on. As capital efficiency becomes much more important now, Fintech Circle recommends establishing a strict capital efficiency discipline for startups and scaleups to achieve sustainable growth to weather the economic storm ahead.”
Indeed, compared to the record highs experienced in 2021, UK fintech investment has been subdued because of geopolitical uncertainty, turbulent public markets, supply chain disruptions, inflation, and increasing interest rates.
The pound also fell to a record low on Monday, September 26, while government bonds incurred heavy losses, sparking expectations that interest rates will rise in an emergency. The currency sank as low as $1.035 early in the morning before stabilizing just below $1.08.
Speaking to Olivia Minnock, editor at Fintech Alliance, she explains, “There’s no denying the macroeconomic outlook is poor domestically and globally, including issues from rising interest rates and inflation to supply chain problems and political instability, and as this continues naturally into H2 it may well further decrease valuations. However, this could be a positive for the sector in the long run, as the huge number of fintechs we have in the UK begins to rationalize. Growing companies refocus on projects and developments which can bring a real return on investment since it’s necessary for many to now think about how they can reach profitability faster.”
“At FinTech Alliance, our main focus is increasing the impact of fintech on the GDP of the UK, and we believe that moving forward, it will become clearer what a huge impact our sector can have on other areas of the economy, especially those like hospitality and retail which suffered so much in 2020-21.”
The fintech landscape
However, the figures do not necessarily indicate a significant impact.
“First of all, are these statistics as dramatic as they seem? Not necessarily. It’s important to remember when looking at these figures that last year’s investment stats were a huge outlier – mainly contributed to by huge deals like $14.8bn in Refinitiv – and in comparison with 2019, for example, which we might call the last ‘normal’ year we’ve experienced, the figures are a lot more consistent – in H1 2019, fintech investment was lower at $3.8bn for the UK,” explains Minnock.
She also points out that the downturn in investment is not seen across the fintech landscape. “We can see from Pitchbook that financial services IT investment is up 83.8%. This reflects that businesses providing B2B solutions to larger customers — like banking incumbents looking to transform their offering — could continue to prosper despite waning demand in other sections of fintech.”
It is also worth noting that global investment in the regtech sector showed strong resilience compared to other areas of fintech in H1 2022. Globally, investment across 157 deals follows a similar trajectory to the level of investment seen in 2021.
Based on the report, total fintech investment and deals volume declined in the Americas and EMEA regions. In contrast, Asia-Pacific saw a new annual high in fintech investment despite a decline in deals, meaning the UK might just be following the global trend in fintech investment.
The UK’s new chancellor Kwasi Kwarteng delivered a ‘mini-budget’ last week.
Tax cuts, efforts to make the UK more competitive, and significant tax breaks for startups are critical parts of Kwarteng’s growth plan for the land of tech and fintech startups.
Revealing long-term commitments to the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS), and venture capital trusts (VCTs).
Minnock points out, “We have seen a huge influx of businesses seeking to solve problems across sectors in the past few years. The UK is great to start a fintech company with abundant early-stage capital and a collaborative ecosystem.”
“For some time now, the problem has been scaling – finding that follow-on funding for Series C and above – and \ it will be interesting to see how the current climate impacts this, with the Government keen to keep fintechs here in the UK, which could potentially be impacted by investors’ willingness to double down on companies they already have confidence in. It will also be a time for M&A to increase while valuations are lower. So we may start to see some positivity on the age-old problem of fintechs gaining investment on a strategic level from more traditional players. This week, we saw fintech Monese secure $35mn from HSBC as the banks look to benefit from Monese’s Banking as a Service proposition to improve its offering. I hope to see many more banks taking this attitude to strategic partnerships in H2 – though it’s easier said than done with the current onboarding processes and other hurdles.”
According to Ernest and Young, many institutional investors have faced their most significant challenges for years.
The investment process is being transformed to reflect today’s imperatives, such as environment, social and governance investments, technology, and ever-shifting regulations. This is even though they must do this within an environment that is complex and unsteady.
The number of institutional investors who do not divest from companies with poor ESG performance is growing. 74% of them are more likely to do so today.
Minnock has noticed this shift in other areas of investors and their appetite.
“Anecdotally, we’ve found from our Fintech Alliance Investment Series that there’s been a slight shift in what investors look for – even for very early stage funding, they are now requiring a lot more proof from our founders and more product development and testing to have already been completed than would have been the case in previous years. I would worry that investors’ risk appetite is decreasing, and this refocus on core products. There may be a negative impact on new ideas that need support at an early stage compared to the support they are currently getting – especially those designed to benefit wider groups by boosting financial inclusion or solving problems for specific underserved groups in society. It may be that over the coming year, we see more gradual improvements into the operations of large players to retain the customers they already have.”
Many are wondering what all this means and whether refocusing is necessary. Some fintechs are leaning into their responsibility to users, especially concerning the cost of living crisis, while others focus on profitability.
For instance, Minnock points out that this week that mortgage fintech Habito just added £5 million in funding after its £35 million round in 2020 and says it will ‘refocus’ on its core brokerage services following the financing.
Earlier this year, amid redundancies, BNPL giant Klarna said it would focus on short-term profitability for the time being. And indeed, despite job cuts, fintechs are consistently still hiring but perhaps for more niche, highly skilled roles indicating a clear need for upskilling in the sector.
Bootstrap or alternative finance
Minnocks closing remarks are hopeful for the sector.
“There are plenty of accelerator programs, communities, and incubators supporting fintech startups across the – and as more founders need to bootstrap or look to alternative sources of finance, these will be more important than ever in bringing new ideas to market. They can offer not just advice and mentoring, but networks and potential customers as making those initial sales and proving those MVPs becomes more important than ever.”
“It’s up to us across the sector — associations like Fintech Alliance, the Government, Regulator, and industry players — to identify which fintech ideas will solve real problems for underserved groups and the real problems faced by these founders on their journey.”
Helen Femi Williams is a freelance journalist and podcaster interested in fintech, politics, economics, and their intersections.
She is the host of the letsgetlitical podcast, a fortnightly show interviewing guests from all different sides of the political spectrum, in partnership with the Mozilla Foundation.
Prior to this role, she worked as an innovation consultant developing insurtech and fintech products and ideas for brands, startups, and major corporations.
She studied International Relations at the University of Nottingham (UK and Malaysia).