VC investment in fintech remains robust as M&A activity stalls: KPMG report

EMEA region sees USD4.6 billion in fintech investment in H1’20, with the Middle East sprouting new early-stage fintech hubs

VC investment in fintech remains robust as M&A activity stalls: KPMG report

Dubai, United Arab Emirates: While overall global fintech fundingfell during the first half of 2020, with USD25.6 billion of investment globally across 1,221 deals,corporate deals are driving continued strength in VC activity, according to the Pulse of Fintech H1’20, a bi-annual report on global fintech investment trends from KPMG International.The EMEA region saw USD4.6 billion in fintech investment in H1’20, the report states. 

The fintech market in the Middle East is expected to expand and diversify for the foreseeable future with key jurisdictions all investing in fintech ecosystems. Several jurisdictions within the Middle East have continued to work to become global hubs, and investment in the region was focused primarily on early-stage deals in H1’20. As these markets gradually mature, the region will likely see increasing investment as early-stage fintechs grow.

Abbas Basrai, Partner and Head of Financial Services,KPMG in the UAE,explained: “The UAE government has moved forward with a number of initiatives to help and foster the growth of fintech. The RegLab, a sandbox style program, is a big part of this effort, in addition to programs like accelerate HER to promote diversity in entrepreneurship. These, combined with startup funds, are likely tobe a big part of developing the UAE’s fintech ecosystem over time.”

Covid-19 also catalyzed the acceptance of digital business models in the Middle East, a region that has a very strong tradition of in person, relationship-based service provision. This is driving traditional banks in the region to increasingly consider partnerships and alliances with fintech companies able to help them with accelerating their digital journeys. 

Given the long lead times for deal-making, many H1’20 deals were initiated in late 2019. Covid-19 saw new deal activity slow dramatically, except in high-priority sectors like payments. Despite the pandemic, investor interest in platform businesses remained incredibly strong in H1’20, particularly in less mature fintech markets. Platform business continued to see significant investment from investors and large techs.

A sharp drop in M&A investment drove its global decline. During H1’20, M&A accounted for just USD4 billion of fintech investment globally (compared to USD 85.7 billion in H2’19), including the USD1.3 billion reverse merger of Open Lending. The stalled M&A reflects both a general slowdown in deal activity, and investors pressing pause on major deals to re-consider valuations and risk appetite given Covid-19.

Despite global uncertainty, VC investment stayed strong globally, accounting for USD20 billion in H1 2020. It is on track to surpass previous annual record highs, should the trend continue. In H1’20, VC investment in EMEA accounted for USD4 billion, USD6.7 billion in Asiaand USD9.3 billion in the Americas. 

Covid-19 is likely to remain a key driver of change for fintech investment heading into H2’20, given the strong acceleration of digital trends – such as the use of contactless payments and the demand for and use of digital service models. The ongoing acceleration of digital trends may drive investment not only in direct fintech solutions, but also in related enabling technologies – such as cybersecurity, fraud prevention and digital identity management. Platform businesses may also continue to be a hot ticket for investors, particularly in less mature jurisdictions.