Investment in the UK fintech industry fell to $9.6bn in the first half of 2022, a drop of 65% compared with 2021, according to a report by KPMG. 262 UK M&A, Private Equity and Venture Capital fintech deals were completed in H1 2022, down from 341 in H1 2021. “Geopolitical uncertainty, turbulent public markets, ongoing supply chain disruption, high levels of inflation, and increasing interest rates have all contributed to more subdued levels of UK fintech investment compared to the record highs experienced in 2021.” The EMEA region was affected as a whole, with total fintech investment dropping from $31.6bn to $26.5bn between H2 2021 and H1 2022.
Fintech was one industry to benefit from the Covid-19 lockdowns, as life increasingly shifted online. As such, 2021 saw an unprecedented funding boom in the sector. KPMG had reported in February that UK fintech investment soared to $37.3bn in 2021, up sevenfold from 2020.
Out of the pandemic
A knock-on effect of the funding drop was a spate of layoffs in the sector. The most prominent of these were Klarna and Robinhood, which let go of 10% and 9% of their workforce respectively. But despite these setbacks, experts say the outlook for UK fintech remains positive. “Post-Covid blips aside, in terms of fintech funding the overall longer-term trend is very much on an upwards trajectory. The UK is ranked second globally for fintech investment, highlighting the strong attraction of the UK as a place to invest and innovate. This suggests a buoyant industry with plenty to remain confident about – although it may be that we are seeing a flight to quality, with bigger rounds for fewer businesses,” says Martin Cook, a partner specializing in fintech at legal firm Burges-Salmon.
But H1 2022’s figure remains above those for 2020 and 2019. “Despite a slowdown in UK fintech investment compared to last year, the UK remains at the centre of European fintech innovation with British fintechs attracting more funding than those in France, Germany, China, Brazil and Canada combined,” John Hallsworth, the Client Lead Partner for Banking and Fintech at KPMG UK, said in the report.
Even with the pound falling to record lows against the US dollar, fintechs that have an international footprint will continue to thrive, Cook believes. “In terms of operational balance, those that earn in dollars or other strong currencies look quite good at the moment – and those who will fare better are likely those fintechs that have grown sustainably and so can better withstand wage inflation and other cost pressures. Investment by fintechs will continue, but the rigour for investment decisions will likely further increase. We’ve seen in the past that while some businesses may struggle when market pressures come to bear, others seize the opportunities presented.”