Investing in Fintech: Assessing the Landscape in 2024

Last year saw investment in fintech continue its downward slump following the post-COVID-19 pandemic boom of 2021-2022. Per KPMG’s insights, fintech investment was down a marked 57% year-on-year in H1 2023 and, despite a slight uptick in capital investment in the second half of 2023, investment is still far from its highest levels. 

Although the post-pandemic boom marked unprecedented levels of investment—a result of locked-away capital suddenly being released to kick-start a sector (and wider economy) in desperate need of a restart—venture capital in 2023 was perhaps still short of the figures the industry needed to continue adequately investing in new startups. 

And the macroeconomic conditions that have led to the massive slowdown in 2023 “still exist today”, says Daniel Cohen, CEO at PayU GPO. “Soaring interest rates, political tensions and the fear of recession that has yet to pass will all impact investment decisions,” he adds.

Therefore, venture capitalists (VCs) have been – and must continue to be – far more selective in their investment choices.

For the first half of 2024 at least, while macroeconomic uncertainty persists, Cohen feels investors will be “looking to take less risky bets and seeking to invest in companies that can demonstrate a clear path to profit.”

He continues: “It’s a buyer's market and buyers can be picky.” 

So, with the investment market a selective one, what types of fintechs with high growth potential are VCs looking to invest in?

Fintech investment: What are VCs looking for? 

For Ian Bradbury, Chief Technology Officer for Financial Services at Fujitsu in the UK and Ireland, fintechs focused on consumer lending and payments, as well as those exploiting rapid developments in AI, will likely be most attractive to VCs.

He continues: “Other trends that will influence investment decisions within the sector will include improvements driven by new consumer duty regulations, tighter but easier-to-use security (such as biometrics), renewed interest in cryptocurrencies and Central Bank Digital Currencies (CBDCs)."

Cohen agrees that Gen AI-based fintechs may garner more interest than others, while for Peter Wood, Chief Strategy Officer at Spectrum Search, “VCs are increasingly gravitating towards fintechs that offer innovative solutions in digital payments and blockchain technology”, as well as AI-driven financial services.

Wood goes on: “Fintechs that are addressing financial inclusion and offering solutions to underbanked or unbanked populations are also gaining traction. This shift aligns with a broader trend towards technology that not only drives profitability but also fosters social responsibility and inclusivity.”

Indeed, these investment trends for the first half of 2024 build on some of the deals the industry has seen over the past 12 months or so. Even though 2023 saw a slowdown in funding, this doesn’t mean there weren’t several notable investments. 

In fact, from Cohen’s point of view, 2023 may actually have been ‘bigger’ than any other. 

“What was most exciting from my perspective last year was Rapyd agreeing to acquire PayU GPO for US$610m,” he says. “This marked a pivotal moment in our journey to revolutionise the global payments landscape.”

Another notable deal in the digital payments space saw FIS sell a majority stake in its Worldpay Merchant Solutions business, while one of the largest fintech deals saw Duck Creek Technologies acquire Vista for a staggering US$2.6bn.

For Wood, investment in 2023 helped create a trend of leveraging AI to tailor financial services to individual needs, not to mention “growing trust in blockchain for secure and efficient transactions”.

“These investments are not just capital influxes,” he adds, “but endorsements of transformative technologies that are reshaping the financial sector.”

In addition, these fintech investment preferences for VCs and other investors have been bolstered by new regulations. In the UK, the Financial Services and Market Act 2023 (FSMA23) has promoted the nation “as a competitive and innovative place for financial firms to do business”, according to Bradbury. 

He explains: “This legislation could have a wide-reaching impact. For example, there are specific sections of the Act supporting crypto adoption and the use of Sandboxes to develop solutions.”

Fintech startups: Attracting investment in today’s buyer’s market

As investors look for fintech startups with the greatest growth potential, there are things startups can do to maximise this growth potential and draw the attention of VCs and other investors. 

For Bradbury, startups must “demonstrate an ambitious but achievable growth trajectory and make the most of AI. There should be a focus on solving known issues or helping customers navigate upcoming regulatory changes. 

“That said, startups should not try to ‘boil the ocean’ and take on more than they can handle, instead focusing on making the journey to a scalable solution as easy as possible.”

One way to make the journey easier is to “focus on solving a problem”, says Cohen. 

“Too many startups, both within and outside of fintech, develop innovative technology and then look for appropriate use cases,” he adds. 

“Instead, startups must ensure they are solving a real challenge for potential customers.”

Cohen continues: “Startups should aim for a good balance between profitability and growth. Profit is no longer a ‘dirty word’ and clear paths to profitability are required by today’s discerning investors.

“They should also take advantage of our new truly global talent marketplace. By hiring the best people, leaders are demonstrating that they know what ‘good’ looks like and are comfortable delegating. 

“Companies that build a team with diverse skillsets showcase a commitment to continuous learning and adaptability. This is important, as it shows that those who have been hired are suited to running a fast-scaling business. 

“Investors also appreciate a well-rounded team capable of handling various aspects of a business, staying ahead of trends and adjusting strategies accordingly.”

Wood agrees, adding that “investors are particularly drawn to startups that “solve real-world problems with innovative technology”. 

He concludes: “A solid understanding of the target market, a clear plan for scaling and a robust risk management strategy are crucial. It's also important for startups to show traction, either in terms of product development or early user adoption, to instil confidence in potential investors.”

Will there be a shift in the investment landscape?

With caution continuing to drive a buyer’s market in fintech, how will the investment landscape evolve as we head further into 2024? 

Cohen asserts: “It will continue to be a (cautious) buyer’s market, at least in H1 until some of the economic and political uncertainty is cleared. 

“That doesn’t mean that opportunities don’t exist—quite the contrary—but expect funding and deal sizes to be more on the conservative side. With an ‘IPO spring’ on the horizon and bigger funding made available in the market, we should see an uptick in deal sizes, although, again, I expect that to happen in the latter half of the year.”

Wood concurs that there will be “a more nuanced investment climate in the fintech sector”. 

He adds: “While there's potential for increased funding, especially in cutting-edge areas like AI and blockchain, the market might also exhibit continued caution. 

“This dual trend stems from investors seeking to balance the pursuit of innovative opportunities with the need for prudent risk management in a post-pandemic economy.”

Bradbury is more optimistic, however.  While he admits “uncertainty remains regarding ongoing geopolitical crises and the potential of the 'AI bubble' bursting”, the anticipated fall of interest rates this year and the continued growth of AI-related technologies means 2024 “should be a good year for fintech funding”.