Aussie fintech deal numbers plummet as ‘market correction’ bites

Patrick Bunsci

24 February 2023

The number of Australian fintech investment deals fell from an historic high of 187 transactions in 2021 to 123 transactions last year, according to the latest data from KPMG, with Block’s acquisition of Afterpay propping up an otherwise lacklustre local fintech market.

KPMG’s Pulse of Fintech H2’22 bi-annual report, which tracks fintech investment trends worldwide, revealed a record AU$44.32b (US$30.2b) of investment in Australia’s fintech industry between H2’21 and H2’22.

However, the vast bulk of this value – AU$41b (US$27.9b) – was made up by the acquisition of Aussie buy now, pay later firm Afterpay by US paytech giant Block (formerly Square).

‘Investments’ include transactions resulting from merger and acquisition (M&A), private equity (PE), and venture capital (VC) activity.

Without the Afterpay deal, overall investment in Australia’s fintech sector would have plunged by nearly a third, from AU$4.42 (US$3.01b) in 2021 to AU$3.23b (US$2.2b) in 2022.

Global fintech investment also saw a nearly one-third drop in value over this period, from a record AU$350.59b (US$238.9b) in 2021 to AU$240.82b (US$164.1b) last year.

The total number of fintech investment deals worldwide fell from a record high of 7,321 in 2021 to 6,006 deals last year.

Despite the precipitous investment value drop, however, KPMG asserts that “2022 was not a poor year”.

“In fact, it was the third best year for fintech investment ever and the second strongest year for deal volume.”

After a “bumper 2021”, last year saw macroeconomic challenges begin to bite across the fintech sector, resulting in “a repricing in the overall venture capital market” that continues to affect fintechs in Australia and across the globe, according to KPMG Australia’s head of fintech, Dan Teper.

“The market continues to correct to previous years following a bumper 2021,” Teper said.

“[For] Australian fintechs, this has resulted in fundraising taking longer – often on flat or discounted valuations – while business models have shifted to be more focused on sustainable, rather than top line growth.”

While fintech investment values across the Asia-Pacific region remained mixed, Singapore, one of the region’s biggest fintech hubs, appeared to buck the global trend, seeing a slight year-over-year investment uptick of AU$0.73b ($US0.5b) – from AU$4.98b (US$3.4b) to AU$6.00b (US$4.1b).

Investment subdued into H1’23

KPMG predicts fintech investment globally will remain “quite subdued” this year, “even compared to H2’22”, foreseeing “no end in sight to the macroeconomic challenges plaguing the public markets and the IPO window expected to remain closed well into the first half of 2023”.

Teper said he expects to see “some rationalisation in the market as capital flows correct, and some businesses struggle to attract the capital they need to reach their full potential”.

“This in turn could lead to M&A activity in the coming years,” Teper said, though deal sizes are likely to be much smaller, with investors waiting on valuations of late-stage companies to settle.

KPMG also foresees continued interest and investment in regtech and payments start-ups, particularly from established financial services institutions seeking to fast-track innovation.

Crypto crash spooks investors

Investment in crypto and blockchain fell by nearly US$7b between 2021 to 2022, from US$30b to US$23.1b, with investment in crypto is expected to remain “particularly weak in H1’23”.

According to Teper, the “extreme volatility” of crypto (including the Luna crypto crash and the bankruptcy of crypto hedge company Three Arrows Capital) has resulted in investment challenges for the sector, with investors shifting focus to institutional use cases and governance, risk management, and compliance (GRC) concerns.

“With consumer crypto offerings losing their lustre, investors have started to turn their attention to broader blockchain-based solutions and value propositions,” he said.

“This could drive more diverse investments in the blockchain space in 2023,” including institutional use cases, cross-border payments, gaming, and NFTs.