Photographer: Krisztian Bocsi

Private Funding for FinTech Firms Has Taken a Tumble

Trouble brewing for private companies?

The hottest new things in financial technology are proving to be lukewarm this year.

Funding for startups in the financial technology space — which includes robo advisors, marketplace lenders and blockchain technology firms — fell 17 percent to $2.9 billion in the third quarter, according to a new report from KPMG International and CB Insights. North America in particular saw a big hit, with funding for venture capital-backed fintech companies in the region falling 68 percent compared to the same quarter last year — a period which saw massive rounds of $100 million or more from Social Finance Inc., Avant Inc. and Kabbage Inc.

"While we continue to see significant investment into fintech companies globally, the euphoria for mega-deals that we saw into the latter half of 2015 has waned," Anand Sanwal, CB Insights chief executive, said in the report. "Total investments to key areas like marketplace lending and blockchain technology have both seen declines heading into the tail-end of 2016."

Waning euphoria for privately-owned fintech companies comes after years of strong interest, and feeds into a debate about how long "tourist investors" such as hedge funds, mutual funds and companies will stick around in the sector. Fintech funding from venture capital firms reached a peak of $14.5 billion last year and looks unlikely to top that amount in 2016.

Corporates in particular have been investing in startups as a way of advancing their own technology or generating returns with banks including Citigroup Inc., Goldman Sachs Group Inc. and Banco Santander SA completing seven or more deals each over the past five quarters alone. Corporate participation in global venture capital-backed fintech deals came in at 30 percent in the third quarter, according to the report, up from 23 percent in the same period last year. The trend is even stronger in Asian fintech, where corporate participation in venture capital-backed fintech deals has reached 51 percent, compared to 43 percent a year earlier.

Uncertainty over the impact of the U.S. presidential elections may have dented investor appetite for fintech in the period, the report said. Meanwhile, in Europe, the decision to leave the European Union dealt a blow to the U.K.'s fintech scene, with venture capital-backed deals falling to $78 million from $135 million in the same period a year earlier.

Screen Shot 2016-11-15 at 10.44.43 AM
Source: KPMG, CB Insights
Source: KPMG, CB Insights

Asia saw both of the rounds that topped $100 million, with $449 million raised from electronics retailer and $310 million by credit card management app 51Xinyongka. With those large deals, Asia was the only geographical bright spot during the quarter with the potential to reach a record for venture capital investment in fintech this year.

"We have considerable interest coming from Asia as investors, incumbents and startups are increasingly looking for experienced partners to help them navigate the global fintech ecosystem," said Amy Nauiokas, founder and president of venture capital firm Anthemis Group, adding that while the market is softer than last year, this "sobering effect" helps reveal companies with the greatest potential.

Still, there may be further challenges ahead as investors grow impatient for financial technology to prove itself. Blockchain, the distributive ledger technology behind the largest funding round in North America this year, from startup Ripple Labs Inc., is coming under particular scrutiny, according to the report.

"The ability to move blockchain from proof-of-concept to adoption and production has been minimal," the report said. "While the market is still giving blockchain companies plenty of room to prove themselves, investors are also becoming more concerned about results."

Before it's here, it's on the Bloomberg Terminal.