Several domains of fintech show promise despite an ongoing downturn in acquisitions and other dealmaking interests, while continued innovations point toward growth in the following areas:

• Lending
• Insurance technology (insurtech)
• Cryptocurrency and blockchain
• Business to business (B2B) payments

Fintech Trends Overview

Private investment into fintechs has declined for two years in a row, with deal count returning to levels seen before 2020 after peaking at more than 8,000 deals in 2021. Still, more than $100 billion in aggregate deal value has closed each year since 2018.

Deal sizes are also trending downward as macroeconomic conditions have placed greater pressure on company growth strategies and private fundraising levels.

Fintech subsegments of insurance technology (insurtech) and lending closed more cumulative deal value in 2023 despite declines in deal counts, suggesting that larger opportunities are still closing even with broader dealmaking sluggishness.

Both subsegments, business-to-business (B2B) payments as well as cryptocurrency and blockchain, experienced declines in cumulative deal value of more than 50% in 2023, coming down from two very active years for dealmakers.

Exit activity remains muted, with total exit value declining an additional 32.1% year over year (YoY) in 2023 after dropping 90.7% in 2022. Acquisitions remain the most popular route, and fintechs may see greater M&A activity if interest rate cuts materialize later in 2024.

Private investment into fintech will continue as the value proposition for financial innovation remains strong, but the broader investment landscape is in a holding pattern until macro uncertainty subsides.

Fintech Industry Trends

The fintech industry is witnessing a surge in innovative technologies and services that are reshaping the financial landscape.

Artificial Intelligence (AI)

AI proliferation has reached nearly every industry.

Applications for financial services include:

• Task automation
• Fraud detection
• Market trend predictions
• More efficient customer service
• Reconciliation automation
• Data (management, maintenance, integrity)

If these potential improvements materialize, investor demand for AI integration and planning will grow.

Security concerns have grown alongside AI, and institutions anticipate greater leverage of AI by bad actors. Cybersecurity infrastructure is more critical than ever as threats evolve.

Alternative Lending

Banking industry concerns continue after the Silicon Valley Bank banking crisis in the United States in 2023, which saw the failure of several midsize commercial banks. As a result, regulators are viewing banks and alternative lenders with renewed intensity on third-party risk management and with ongoing considerations of higher reserve requirements for lending institutions.

Government Payment Tools

Government launches of tools—including the US launch of the FedNow instant payments pilot program in mid-2023—reflect a continued push for faster payment schemes.

Federal interest rate policy changes are close on the horizon, with ruling bodies including the US Federal Reserve and European Central Bank deciding to pause interest rate hikes in early 2024 in anticipation of eventual rate cuts expected later in the year.

Investment and Market Overview

Private investment into fintechs accelerated in 2018 when cumulative deal value exceeded $100 billion for the first time. Dealmakers have poured at least that much capital into the space annually since.

Megadeals in 2019, including several acquisitions over $5 billion each, resulted in a record total deal value that year despite a relatively flat deal count from the year prior. In 2021, total deal value and count both shot upward by 82.9% and 66.3% respectively, driven by low-rate policy and expanding multiples.

2022 marked the start of a descent from these record highs as public market turbulence created denominator effects for private investors, and 2023 saw further declines with deal activity reverting to pre-2021 levels.

The United States is one of the largest fintech hubs, accounting for more than 60% of global deal value in 2023. The US market saw a decline in total deal value of 15% from the year prior, showing more resilience compared with the global total. US deal count dropped by 33% in the same period, indicating that fewer deals are driving the resilient total capital.

This growing concentration of private capital is further highlighted by the breakdown of global deal size categories. The largest deals over $2.5 billion each have accounted for a growing share of cumulative deal value for the past three years.

Within the VC realm, financing metrics remain elevated on a historical basis for most stages except for venture growth, which has experienced several swings over the past decade. The two most mature stages, venture growth and late-stage VC, both experienced marked declines in their median financing sizes by more than a quarter in 2023, while the earlier categories of early-stage VC and pre-seed or seed saw more muted, single-digit percentage declines.

The median pre-money valuation for VC-backed fintechs also declined by 8.8% but remains well above its pre-2021 levels. Non-VC deal types within fintech, including strategic M&A and private equity (PE) growth or expansion, both saw their median financing sizes drop by approximately half in 2023, highlighting a more investor-friendly dealmaking environment in which companies that may have otherwise pursued VC funding instead accept lower check sizes through alternative channels.

A record amount of pre-seed or seed deal value was closed in 2022, along with the second-highest annual level of early-stage VC deal value, broadening the pipeline of new market entrants, and the winning investments continue operating despite the slowdown in new financings since then.

Macroeconomic shifts are driving sweeping changes in financial behavior, bringing renewed interest to consumer-facing products including alternative lending and earned wage access. Early signs of recovery for the cryptocurrency ecosystem and continued maturation of payments companies are also retaining investor interest.

Read on for further analysis of key verticals within fintech.

Fintech Innovation Spans Several Key Verticals

Lending

The rise of interest rates since 2022 from zero into recent highs has driven significant changes in the financial services sector. As the cost of debt funding rose, accessibility fell, boosting demand for private credit and alternative lending products.

Consumer financing platforms drew in several of the largest VC deals of the past two years, including Ant Group’s consumer finance arm and open banking start-up Abound. Consumers have faced mounting costs due to high inflation, contributing to increased consumer debt.

Payouts for savings and other interest-bearing accounts have also risen, compressing net interest margins for banks. These effects are expected to subside over the next year as interest rates come down, potentially slowing the boon for alternative lenders.

Banks still face some lingering effects of the US banking crisis in 2023, though, and increased regulatory scrutiny is expected. Higher capital requirements and credit loss reserves are top of mind for regulators. Oversight of alternative lenders and banking-as-a-service providers is also expected to grow, with regulatory bodies in multiple regions calling for investigation into non-bank financial intermediation activities.

While regulators and operators look to strike a balance between traditional and private lenders, dealmaking in the space continues. Private investment into lending-focused fintechs has shown notable resilience since the late 2010s, drawing in more than $10 billion globally each year since 2017. Total deal value also grew 30% in 2023, when many other segments and industries experienced marked declines.

Insurtech

Insurtech was the only other fintech subsegment that managed to notch a higher amount of private investment in 2023 compared with the year prior, rising by 45.4% and compensating for some of the decline seen in 2022.

This higher dollar value coincided with a 28.7% decline in deal count, however, with the fewest individual deals closed since 2016. Much like lending fintechs, insurtechs operate in an industry dominated by a few massive traditional incumbents.

Competition between these incumbents, as well as legacy infrastructure upholding critical products and services, have created opportunities for companies that can provide technological efficiencies. Private investment into insurtechs has grown over the past decade, albeit inconsistently as the ecosystem emerged.

From an incumbent’s standpoint, licensing agreements and vendor relationships may take precedence over an M&A transaction, and lingering high rates appear to have further slowed the latter over the past two years, contributing to a decline in overall deal volume. The need for technological agility and a competitive edge will only continue to rise, however, reserving some opportunities for insurtechs in the years to come.

Prudential’s closure of a $2.3 billion acquisition could be a possible indicator of a shift away from insurtech by legacy players, though it may be too early to see.

Cryptocurrency and Blockchain

Signs of spring are emerging after a drawn-out cryptocurrency winter and high-profile court proceedings against cryptocurrency platforms including FTX and Coinbase. Regulatory structures surrounding these exchanges are attempting to evolve at a rapid clip, and more precedent-setting litigation and legislation are all but guaranteed in the coming years.

Despite these uncertainties, dealmakers continued to invest in cryptocurrency and blockchain technologies throughout 2022, closing $24.2 billion across a larger number of deals compared with 2021. Broader pessimism surrounding cryptocurrency’s place in the financial services realm had a delayed effect on private investment activity, with deal value dropping by more than two thirds to $8 billion in 2023. Still, more than 1,000 deals closed last year for a higher annual value than each year of the later 2010s.

Sentiment around cryptocurrency is improving, and the struggles of the past three years appear to be severe growing pains. Cryptocurrency exchange-traded funds have entered the public markets and web3 protocols are expanding, offering additional channels for utilization and scalability.

Private investment in cryptocurrency and blockchain offerings will reflect the performance of these expansions over the next several quarters. A resurgence to 2021 and 2022 highs is unlikely, but more measured investment and new entrants can be expected, particularly on the VC front.

B2B Payments

Deal flow in the B2B payments segment grew steadily for much of the 2010s with a few megadeals in the mix. Like many other segments, deal value skyrocketed in 2021 and stayed elevated in 2022 until normalizing again in 2023 with a decline of more than one-half.

Digitization of enterprise infrastructure accelerated during the pandemic, and private investment in the space grew by more than 50% in 2020 and then more than doubled in 2021.

The launch of the US FedNow pilot program in mid-2023 underscores the demand for instant payment schemes among depository institutions and their customers. A faster underlying foundation for interbank exchanges will take time to implement and troubleshoot but will eventually benefit both institutions and individuals in terms of settlement speed and cost.

Automation and AI are also driving changes in the payments space, with use cases including more efficient customer service and fraud detection. These factors, along with the surge in activity that played out during the pandemic, will shape the segment’s development over the next several quarters as invested capital is put to work. That said, new investment into the space slowed in 2023 and may remain muted until macroeconomic tides begin to shift.

Consolidation on the Horizon

The ebb and flow of industry consolidation continues. On one hand, financial services behemoths are grappling with decentralized products and currencies, greater geopolitical fragmentation, and renewed vigor in criticisms of long-standing oligopolistic fee structures like Visa and Mastercard, which recently took a legal blow that will result in lower fee income over five years, pending court approval. Conversely, banks and traditional institutions remain relatively fortified with massive balance sheets and highly developed infrastructure and payment networks.

Privately invested capital has become more concentrated among major investors as well, and contraction in multiples since 2021 has created stress among many start-ups that now may be more likely to pursue a sale to an incumbent or competitor at a discount. In this environment, fintechs aiming for fundamental industry disruption face greater hurdles than those inclined to integrate with an existing major player, given continued VC headwinds.

Exit opportunities for the latter group remain more fruitful, though targets appear to balk at purchase prices, resulting in double-digit percentage declines in exit count for that category for the past two years.

As the dust settles after two years of slower dealmaking and interest rates begin to drop, the fintech space will likely start to see a wave of consolidation through strategic M&A transactions. Acquisitions remain the most common exit type for fintechs as new public listings struggle to break through early trading difficulties.

Slower new deal flow and smaller financing sizes in the late-stage VC category may slow the pipeline of public listings further, but resiliency in the earlier stages combined with cautious optimism regarding IPO prospects could see more companies pursuing this exit route. PE firms also maintain an interest in fintech, with consistent levels of both buyout and growth or expansion deals since 2021, when firms materially increased their footprint in the space.

Fintech’s Frontier

Three major themes will shape fintech’s direction over the coming quarters:

• Proliferation of transformational next-generation technologies, namely AI and auxiliary capabilities
• Socioeconomic-driven changes in consumer financial behavior
• Regulatory directives

Agility is key for financial services firms to adjust to these changes, which create opportunities for fintech players to provide support and integrate themselves into the broader financial system. With financial fraud on the rise and cybersecurity needs expanding largely due to AI, institutions require faster, more efficient controls.

Consumer demands, including faster payment processing and personalization, raise the stakes for these controls as well. The biggest catalyst for upcoming change in the financial sector is arguably the direction of interest rate policies, with several global powerhouses on the precipice of rate cuts in 2024 following drawn-out battles against inflation.

The effects of inflation linger with rising use of buy-now-pay-later products and consumer debt among concerns for certain lenders and regulators. Legal proceedings against cryptocurrency platforms will impact dealmakers as well. There are several key risks facing fintechs, but outsourcing innovation remains a valuable lever for large incumbents to pull, especially in times of uncertainty.

The wait-and-see approach that many investors took over the past two years is beginning to wane, with slower fundraising and tighter liquidity contributing to mounting pressures. 2024 will likely mark key developments in the financial services industry, and private dealmaking in fintech will respond in kind.

Methodology

Fintech, cryptocurrency, insurtech, and B2B payments within this publication were defined using the PitchBook verticals for each. Lending was defined using a mix of relevant keywords that had to be contained within the company’s profile.

Companies in the underlying population had to have at least one of those industry codes tagged as their primary industry code. Standard PitchBook methodology regarding venture transactions and venture-backed exits was used for all datasets, and similarly for PE or other private investment types. Full details can be found here.

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Additional Resources

• Fintech
• Financial Services Consulting Practice