Geopolitical and economic uncertainty fuelled by events including conflicts in Ukraine and the Middle East, the high interest rate environment, and tight liquidity across regions saw fintech investors holding onto their cash throughout much of last year.

UK fintech investment in 2023 was the lowest since 2020 ($6.5bn) and the Covid-19 pandemic. Disregarding 2020 as an outlier year means that UK fintech investment in 2023 is at its lowest levels since 2017 ($11.21bn).

John Hallsworth, client lead partner for banking and fintech at KPMG UK, says: “A storm of global challenges made 2023 an incredibly tough year for the UK fintech market. While there were good deals to be had, fintech investors increased their scrutiny of potential deals, putting a sharp focus on the viability of business models and on profitability.

“This downturn is not isolated to the UK and despite the drop in investment, the UK remains the capital of European fintech innovation with British fintechs still attracting more funding than those in France, Germany, China, India, Brazil and Canada combined.”

The largest fintech deal in Europe in 2023 was the $6.9 billion PE raise by UK-based Finastra.

“Looking ahead to the first half of 2024, investment in the UK fintech sector is expected to remain relatively soft, although investment will likely begin to pick up as interest rates reduce with common consensus that this will be in Q3/Q4.”

Total global fintech funding across M&A, PE and VC reached a six-year low of $113.7 billion across 4,547 deals in 2023, down from $196.6 billion across 7,515 deals in 2022. The payments space continued to account for the largest share of fintech funding among the fintech subsectors, despite a drop from $57.9 billion to $20.7 billion between 2022 and 2023.

Only proptech and insurtech saw total investment rise year-over-year, with investment in tthe former rising from $4.1 billion to $13.4 billion, and insurtech investment growing from $5.9 billion to $8.1 billion.

Karim Haji, global and UK head of financial services at KPMG, added: “The fintech market has been evolving and maturing since it got its start in 2004 and really came into its own in 2008. The technology underpinning fintech keeps changing, and we’re seeing the pace of change accelerate with the application of AI and generative AI. You could say that we’re coming into the next wave of fintech. While the investment numbers are soft now - due to broader market conditions - the next year could be quite exciting for innovation in the fintech space.”