Reaching $5.8 billion in Q4’17, U.S. fintech investment increased for the third straight quarter, aided by a strong U.S. economy and a dramatic increase in private equity (PE) investment, according to the KPMG Pulse of Fintech report.
Total deals volume and VC-specific deals volume decreased somewhat during Q4’17, although the decline was relatively modest compared to the decreasing number of deals seen in the technology sector more broadly.
The U.S. Q4 investment accounted for two-thirds of the global investment of $8.7 billion; and U.S. full-year 2017 investment of $15.2 billion represented almost half of the total global investment of $31 billion.
PE investment in the U.S. skyrocketed during Q4’17, accounting for $3.4 billion in deals activity – the second highest quarter of PE investment in fintech on record.
“The growing maturity of key sub-sectors within fintech, such as payments and lending, has led to larger deals and increased interest by PE firms and corporates,” said Brian Hughes, National Co-Lead Partner, Venture Capital Practice, KPMG LLP. “Both traditional corporates and some of the more well-developed fintech companies in the U.S. see strategic acquisitions as a ready means to make leaps in innovation, bridge operational or service gaps, or expand. For traditional financial institutions, a buy approach also ensures they have their feet on the ground with respect to innovation, and better access to knowledge as to how the fintech ecosystem will continue to evolve.”
Overall M&A activity in U.S. fintech for 2017 was strong, totaling $8.7 billion over 154 deals.
“We are seeing the more mature fintechs, the ones that have achieved a certain scale, now looking to branch out into new service areas and to complement their core offerings through inorganic growth,” said Anthony Rjeily, Digital and Fintech practice leader for KPMG LLP. “They are starting to invest in and acquire small fintechs themselves. This is a new dynamic in the fintech funding space, but one we will continue to see moving forward.”
First-time VC-invested financings of fintech companies in the U.S. during 2017 reached a record $478 million, up from $328 million in 2016, and eclipsing the previous high of $457 million in 2015. The number of deals in 2017 was at 126, down from 130 in 2016.
While payments and lending focused companies continued to dominate fintech investment in the U.S., other areas also gained attention in 2017. Insurtech gained more traction among investors given the operational challenges faced by traditional insurance companies and the applicability of innovative solutions such as AI, machine learning, IoT and blockchain.
During the second half of 2017, the U.S. started to see interest in digital mortgages accelerate. Mortgages are considered to be a growth area for digital disruption because the current processes are cumbersome and labor intensive. Digital mortgage company Blend raised a $100 million funding round in 2017. This area is expected to remain hot over the next few quarters as other lenders begin to reimagine their mortgage processes.