Number of Australian fintech deals falls from 2021 high amidst global fintech downturn: KPMG’s Pulse of Fintech H2’22

Australian fintech investment deal volume fell to 123 transactions in 2022, from a historical high of 187 transactions in 2021, according to the Pulse of Fintech H2’22 – a bi-annual report published by KPMG highlighting global fintech investment trends. While a record US$30.2 billion of investment was tracked for the year, US$27.9 billion was due to the Afterpay acquisition by Block. Without this transaction, overall fintech investment would have fallen from US$3.01 billion in 2021 to US$2.2 billion in 2022.

After reaching a record US$238.9 billion across 7,321 deals in 2021, total global fintech investment across M&A, PE, and VC fell to US$164.1 billion across 6,006 deals in 2022. While results were substantially lower compared to 2021’s peak highs, 2022 was not a poor year. In fact, it was the third best year for fintech investment ever and the second strongest year for deal volume.

The sharp drop-off in fintech investment between H1’22 and H2’22—from US$119.2 billion to US$44.9 billion—highlights the rapidly shifting market conditions much more clearly. In particular,H1’22 saw numerous US$1 billion+ deals, including eight M&A transactions —the acquisition of Australia-based Afterpay by Block, two VC raises—Germany-based Trade Republic and UK-based Checkout.com, and one PE deal—US-based Genesis Digital Assets.

“2022 saw a repricing in the overall venture capital market, which affected fintechs both globally and in Australia,” said KPMG Australia Head of Fintech, Dan Teper. “The market continues to correct to previous years following a bumper 2021, and for Australian fintechs this has resulted in fundraising taking longer – often on flat or discounted valuations, while business models have shifted to be more focused on sustainable, rather than top line growth. Within the ecosystem, crypto’s extreme volatility has resulted in investment in associated assets and businesses to be challenging. However we have also seen ongoing interest in areas like regtech and payments, and continued appetite amongst incumbent financial services players for the innovation opportunities that fintech startups bring.”

2022 Australian Highlights

• Australian fintech investment was a record US$30.2 billion due to the US$27.9 billion acquisition of Afterpay by Block.
• Not including the Afterpay deal, Fintech investment fell to US$2.2 billion from US$3.01 billion in 2021.
• Australian deal volume across VC, PE and M&A fell to 123 transactions in 2022 compared to 187 transactions in 2021.

2022 Global Highlights

• Global fintech investment was US$164.1 billion across 6,006 deals in 2022 – down from the record high US$238.9 billion across 7,321 deals in 2021.
• Payments remained the strongest area of fintech investment globally in 2022, with US$53.1 billion in investment compared to US$57.1 billion in 2021; Regtech was the only sector to buck the downward trend, with investment in the space rising from US$11.8 billion in 2021 to a record US$18.6 billion in 2022.
• Investment in crypto and blockchain fell from US$30 billion in 2021 to US$23.1 billion in 2022. The decline in the second half of the year was particularly sharp—as scrutiny in the space picked up significantly in the wake of the May Terra (Luna) crash and the November bankruptcy of FTX.
• Global M&A deal value dropped from US$105.1 billion in 2021 to US$73.9 billion in 2022; global VC investment declined from US$122.9 billion to US$80.5 billion year-over-year. PE growth investment dropped less sharply, falling from nearly US$11 billion in 2021 to US$9.7 billion in 2022.
• The Americas attracted US$68.6 billion across 2,786 deals in 2022—of which the US accounted for US$61.6 billion across 2,222 deals, while the Asia-Pacific region attracted US$50.5 billion across 1,227 deals, and EMEA attracted US$44.9 billion across 1,977 deals.
• Corporate-participating VC investment globally fell from US$62.8 billion in 2021 to US$39.6 billion in 2022.
• The median deal size rose for both angel and seed-stage deals (from US$1.8 million in 2021 to US$2.4 million in 2022) and early-stage VC deals (from US$5.75 million to US$6 million)—while falling for later-stage VC deals (from US$15 million to US$13.9 million).

Crypto and blockchain investors shifting focus to institutional use cases and GRC

Investment in crypto and blockchain fell to US$23.1 billion in 2022 from US$30 billion in 2021. The decline was particularly noticeable in the second half of the year as investor sentiment related to the consumer crypto space and crypto exchanges plummeted following the Terra (Luna) crash in late H1’22 and the bankruptcy of crypto hedge company Three Arrows Capital in July. With consumer crypto offerings losing their lustre, investors have started to turn their attention to broader blockchain-based solutions and value propositions, including institutional use cases and GRC applications. This could drive more diverse investments in the blockchain space in 2023.

US drives fintech investment in Americas; region sees record Seed stage investment

Fintech investment in the Americas was US$68.6 billion in 2022, with the US accounting for most of this total (US$61.6 billion). By comparison, Brazil attracted US$1.8 billion and Canada attracted US$1.3 billion in fintech investment. While total investment declined year-over-year in the Americas, angel & seed-stage deals attracted a record US$4.5 billion—up from US$3.4 billion in 2021. Angel & seed-stage deals also saw the median deal size rise from US$2.4 million to US$3 million year-over-year. The Americas also saw its second strongest year of CVC-participating investment in 2022, with US$18.2 billion of investment; the US accounted for US$14.9 billion of this total.

Fintech investment in Asia-Pacific rises to record US$50.5 billion in 2022

Fintech investment in the Asia-Pacific region climbed to a slight new record high in 2021, rising from US$50.2 billion in 2021 to US$50.5 billion in 2022. The US$27.9 billion acquisition of Australia-based buy now, pay later company Afterpay by Block in H1’22 accounted for over half of this total. The impact of the one megadeal was particularly noticeable when looking at H1’22 and H2’22 results separately—with fintech investment in H2’22 just US$5.8 billion, compared to the US$44.6 billion seen in H1’22.

As a result of the Afterpay acquisition, Australia led fintech investment in the Asia-Pacific region—with US$30.2 billion of investment. Despite a decline from 2021’s US$7.9 billion, investment in India remained robust at US$6 billion. Singapore saw fintech investment rise from US$3.4 billion to US$4.1 billion year-over-year. Fintech investment in China remained very weak in 2022 at just US$770 million.

Fintech investment likely to remain subdued heading into H1’23

With no end in sight to the macroeconomic challenges plaguing the public markets and the IPO window expected to remain closed well into the first half of 2023, fintech investment globally is expected to remain quite subdued, even compared to H2’22. While M&A activity could begin to pick up, deal sizes will likely be much smaller as investors wait for valuations of late-stage companies to settle. Regtech will likely remain one of the most resilient sections of fintech investment, in addition to B2B solutions within all fintech verticals. While investment in crypto is expected to be particularly weak in H1’23 as investors reconsider their due diligence processes and regulators consider tightening crypto regulations, the broader area of blockchain-based solutions—including institutional use cases, cross-border payments, gaming, and NFTs— will likely gain additional attention from investors.

Despite any short-term softness in the global fintech market, the long-term outlook for fintech investment remains quite positive given the ongoing transformation of financial services occurring in many different jurisdictions and the growing focus globally on embedding financial services offerings into other sectors.

“Over the past few years, we have seen a wave of cash lift the Australian fintech environment – helping to drive mass innovation and create a thriving and vibrant ecosystem of active startups, scaleups and mature businesses,” said KPMG Australia Head of Fintech, Dan Teper. “We can expect to see some rationalisation in the market as capital flows correct, and some businesses struggle to attract the capital they need to reach their full potential. This in turn could lead to M&A activity in the coming years. Regardless, the success of Afterpay and the ongoing opportunities to innovate in financial services mean that fintech opportunities and investment will continue to be supported, even if we don’t match the record levels of previous years.”