Updated Jan 10 to reflect the SEC's approval of 11 Bitcoin spot ETFs in final paragraph.
Hey fintech friends,
Trends that went out in 2023: Low interest rate expectations, crypto fraud, 2-3 day ACH settlement windows, shoulder pads, and bank failures (... we hope).
What’s in for fintechs in 2024: EBITDA, generating yield on idle cash, Open Banking mandates, and Buy Now, Pay Later profitability.
In this edition of our quarterly Signals Roundups, we’ll dive into fintech activity in Q4, review overall activity in 2023, and highlight the biggest trends for fintechs going into 2024. For new readers, Signals is the premium subscriber edition of TWIF designed to get you away from the headlines and to explore the larger trendlines. Each quarter, we break down four key questions on fintech activity:
Which concepts are getting funded?
Where are exits, M&A, and SPACs concentrated?
Which firms are raising debt and venture funds for fintech?
Which products were launched over the last quarter?
If you haven’t already, subscribe to future editions here!
Overall activity
Fintechs raised $7.21 billion in Q4, closing out 2023 with $28.7 billion in total equity funding across 942 deals. Q4 funding represents a 61% QoQ rebound, but total funding in 2023 was still down 45% from the prior year– driven by a 33% drop in the number of deals closed and average deal size shrinking 19% YoY.
See Q4 ‘23 data here (for paid subscribers only).
Global tech funding hit a 5-year low in 2023, immediately impacting fintechs of all sizes: 17% of fintech raises are now down rounds; the overwhelming majority of companies in the FinTech IPO Index continue to trade below IPO price, and a 25% spike in fintech layoffs in 2023 cut roles for over 16,200 employees.
On the flipside, renewed focus on financial health (vs. growth at all costs) started to bear out in fintechs’ performance towards the end of the year. The Fintech IPO Index ended 2023 up 55% on H2 earnings reports that reprioritized profitability over growth in 2024. We’ll explore these strategies further below.
Source: Fintech Brain Food - The State of Fintech 2023
Stay tuned for news on the biggest fintechs that could go public this year: Stripe, Klarna, Chime, Plaid*, Starling, and Apex (👀 the clearing infrastructure company just confidentially filed for IPO in December).
See Q4 ‘23 data here (for paid subscribers only).
Let’s dive into fintech activity in Q4, the biggest overall trends in 2023, and what these trends indicate for fintechs in 2024.
* 👋🏽 My former employer.
Q4'23 Roundup
Which concepts are getting funded? 🤑
Activity continued to accumulate towards pre-seed, seed, and Series A rounds as investors sought higher upside from startups that are still years out from exit. If this trend continues, 2024 could be the year of Series A raises in fintech:
See the full Q4‘22 data here (for paid subscribers only).
Areas that received the most funding were:
Business financial management, led by CarData’s $100 million raise, Stampli’s $61 million Series D, Black Ore’s $60 million seed round, and Indy’s €40 million Series C.
See the full Q4‘23 data here (for paid subscribers only).
A few concepts received notable funding, including:
AI-powered business financial management. As we covered in Q2, one of the biggest immediate use cases for AI in fintech is automating business financial management. In Q4, funding to Stampli underscored the opportunity for AI to streamline AP management, as did funding to Black Ore, Puzzle, and Basis in accounting, Kapital, Statement, and Aleph in business financial intelligence, and Arteria AI in contract lifecycle management.
Open Banking, with Brite raising a Series A ahead of PSD3 updates coming into force for Open Banking players in Europe; Kiwi’s Series A furthering card-based alternatives to the standard QR code-based UPI payment experience in India; Promoteo and Finerio’s raises accelerating pan-Latin American data aggregation solutions; Spare’s seed round paving the way for its expansion in the Middle East, similarly to Akahu’s raise in Australia & New Zealand.
B2B spend management, with CarData, Candex, Lanes & Planes, Center, Pivot, Capital OS, Procurify, Bujeti collectively raising over $252 million to help companies manage expenses (and help employees answer the age-old question, “Can I expense this?”).
Where are exits, M&A, and SPACs concentrated? 📈
Goldman’s sale of Greensky to a consortium of PE firms marks another step in the bank’s exit from consumer financing (and retail banking more broadly).
In investment infrastructure TMX Group, the owner of the Toronto Stock Exchange, completed its acquisition of VettaFi, an American investment data firm. Canadian investor relations firm Q4 was acquired by PE fund Sumeru.
The European Payments Initiative acquired iDeal and Payconiq to accelerate its B2C payments roadmap. NomuPay (the business spun out of Wirecard’s liquidation) acquired Total Processing Solutions to enhance tooling for merchants. Berkshire Hathaway sold its remaining stake of India’s Paytm for a 40% loss.
Which firms are raising debt and venture funds for fintech? 💰
Canapi Venturesraised its $750 million Fund II to support companies of all stages working to build “a sounder, more inclusive and equitable financial ecosystem.”
Leapfrogcommitted $500 million in funding towards climate action ventures in Asia and Africa.
Flourish Venturessecured $350 million in new capital to invest in fintech with a purpose across the US and emerging markets.
Visalaunched a $100 million fund to invest in generative AI startups.
Standard Chartered's venture arm joined forces with Japan's SBI Holdingsto set up a $100 million investment company in the UAE focused on digital asset ventures.
Which products were launched over the last quarter? 🚀
Bank-to-bank transfers abounded– with Astra launching FedNow support, JP Morgan’s Pay-by-bank release, Paystack rolling out direct debit for Nigerian businesses, Modern Treasury’s instant microdeposits, SWIFT’s real-time cross-border payments to Europe, TreviPay’s global B2B transfer APIs for banks, and Melio’s real-time B2B payments.
Support for BNPL was rolled out by US Bank, Airbnb, and Standard Chartered.
A number of fraud detection tools were launched by Coris, Orum, Google DigiKavach in India, Socure, Oscilar, DigiSure, and Check, while CLEAR’s One-Click KYC marked the identity verification platform’s official entry in the financial services space.
Q4’23 Roundup: Fintech’s In/Out List for 2024
Despite ongoing gloominess in capital markets, there are a number of fintech trends we’re excited to see accelerate this year– as well as some others we look forward to leaving in 2023.
Our Fintech In/Out List for 2024:
At their peak in 2021, fintechs in F-Prime’s Fintech Index traded at 21.7x LTM revenue on average in public markets. Today, that multiple is at a historic low of 3.7x revenue. Investors in the current Post-ZIRP era are moving away from metrics of scale to focus on financial health, and companies have responded in latest earnings by easing growth targets, reprioritizing profitability over growth goals, and announcing the implementation of cost management strategies.
Source: F-Prime Fintech Index
Adyen stock surged 38% (its biggest gain since going public in 2018) after its latest earnings reduced growth targets and announced more concrete steps towards profitability goals. SoFi’s stock gained 116% in 2023 amid the student loan repayment freeze; the company reported growing EBITDA 121% YoY by diversifying its product portfolio into non-lending financial products.
Source: Morgan Stanley
Uncertainty about the health of the economy carries into 2024 which, as it turns out, could be great for BNPL businesses. Consumers tend to borrow more when the economy cools down; right now, consumers expect inflation and wage growth to continue softening, while credit card debt is soaring to 10-year highs after having exceeding $1 trillion in November.
Source: CNBC
BNPL companies have proven their ability to mitigate delinquencies and, in the process, profit from user growth. Over the holidays BNPL funded a record $16.6 billion in e-commerce purchases– up 14% from the last 2 months of 2022– as Klarna reported its first quarterly operating profit in 4 years, Tabby reached a unicorn valuation with the close of its Series D, and Affirm stock ended the year up 400%.
High interest rates are a blow to fintechs in the mortgage space, not least Better.com– whose stock tumbled over 90% at IPO– and Ribbon, which had to be acquired by EasyKnock after its credit facilities were tightened by lenders. Other real estate fintechs that raised in 2023 have been helping homebuyers cope with the high cost of mortgages by offering agent fee rebates (à la Prevu), down payment assistance (Stairs), gradual secondary home ownership (Summer), or Simply 😉 by purchasing from homeowners outright for no fees.
Conversely, higher interest rates are great for anyone looking to generate yield on idle cash. Fintechs and banks are now offering APY as high as 5.15% to compete for customer deposits. Investment platforms like Public and Wealthfront have launched solutions to give retail investors exposure to fixed income instruments like treasuries and corporate bonds.
Instant payments are coming to the US… soon. 2023 marked the much-anticipated arrival of FedNow, the US Fed challenger to The Clearing House’s Real-Time Payments network. As of 2022, instant payments accounted for 27.8% of electronic payments initiated globally but only 1.2% of transactions in the US. FedNow and RTP weren’t designed to work together, and it doesn’t seem like the two systems will become interoperable anytime in the next few years.
Source: The Clearing House
Why did the US need two instant payment networks that will now compete for volume when we’re already one of the last major countries to support real-time payments, you ask? Wouldn’t it make sense to make the two networks interoperable as a means to encourage adoption, given that it will take at least another 2-3 years for all 10,000 banks in the US to implement either one of these systems? Because… yeah, I’m asking too.
Thankfully, fintechs are stepping in to streamline the implementation process for banks, and third-party processors (👀 Modern Treasury, Plaid…) are launching real-time payment offerings compatible with both RTP and FedNow.
Instant bank transfers pose a bigger threat to card networks’ interchange revenues than ever before. As Michael Simon points out, card networks have been fighting against the emergence of real-time payments in the US by increasing client incentives (discounts on the fees that card schemes charge banks and other players in the payment chain) to encourage network adoption.
In Europe, TWIF's Europe & UK Editor Michael Jenkins is looking out for SEPA instant payment mandates to come into force in 2024. The European Payments Initiative has been working to accelerate SEPA adoption (read: increase competition with Visa and Mastercard) in pan-European payments; in 2023, the bank consortium announced plans to launch its own mobile wallet, wero, that will enable payers to easily initiate transfers between any two bank accounts in SEPA. The wallet will also enable issuing banks to reclaim the share of interchange that wallets like Apple Pay and Google Pay currently take on card transactions, and plans to support the ECB’s eventual release of a digital euro (see our Q3 breakdown on the global state of CBDCs).
Leading the pack on instant bank transfers: India’s UPI network. UPI has effectively replaced cash and cards as the primary payment method in small-volume transactions, which isn’t sitting well with Visa and Mastercard. Rupay and Kiwi are now offering card-based alternatives to UPI’s standard QR code experience, so it seems likely that UPI adoption is only set to accelerate from here.
Source: RBI, Bernstein
On January 10, the SEC announced the approval of 11 Bitcoin spot ETFs offered by asset managers including BlackRock, Fidelity Investments, ARK Investment Management, Invesco, and WisdomTree. These ETFs open the door for investors to gain exposure to crypto without investing in underlying cryptoassets directly. Standard Chartered estimates that this could bring inflows of $50 billion to $100 billion to the Bitcoin market this year.
