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VC Funding Drives Fintech Investment Surge in Q2: KPMG

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Overall fintech funding in the U.S. grew to $2 billion across 129 deals in the second quarter, up $500 million from the first quarter, according to KPMG’s latest Pulse of Fintech report.

Venture capital investment drove the quarter’s fintech funding surge, with some $1.5 billion across 104 deals, making it the second-strongest quarter ever for venture capital fintech investment, the report said.

KPMG’s analysis showed that investor interest in the U.S. shifted to a focus on business-to-business and helping to improve cost efficiencies of mid- and back-office functions. Three of the quarter’s top 10 deals were focused on the B2B market rather than customer-facing front-office initiatives.

“Early on, the focus of many fintech startups was geared towards enhancing the customer experience, but now we are also seeing them turn their attention to automating mid- and back-office banking applications,” Brian Hughes, co-leader of KPMG Enterprise Innovative Startups Network and national co-lead partner of KPMG’s venture capital practice in the U.S., said in the statement.

“In addition to this shift we also expect to see increased investment in blockchain, insurtech and regtech over the next few quarters.”

According to KPMG, total global fintech investment more than doubled quarter over quarter to $8.4 billion across 293 deals, up from $3.6 billion in the January-to-March period. Global venture capital funding remained solid with $2.5 billion invested across 227 deals.

The Americas region led second quarter fintech funding, on the strength of the $3.6 billion buyout of Toronto-based payments company DH by U.S.-based Vista Equity Partners. The deal was the largest foreign takeover of a Canadian company since 2014, KPMG noted.

Excluding the DH deal, the U.S. continued to set the pace in the Americas with five of the top 10 fintech deals globally:

  • AvidXchange, payments/transactions — $300 million
  • Bright Health, insurtech — $160 million
  • Pos Porta, institutional/B2B — $158 million
  • Fast Match, payments/transactions — $153 million)
  • Addepar, wealth/investment management — $140 million

Other Q2 Findings

In the second quarter, overall deal count with corporate participation in fintech-focused venture capital deals increased to nearly 21% from 14% in the first quarter.

Angel and seed-stage deals continued to decline, with just 36 deals, down from a peak of 75 deals in the first quarter of 2015.

Wealth management was a hot investment area in the second quarter. As noted, Addepar in Mountain View, California, raised $140 million, and Robinhood, a personal finance outfit in Palo Alto, raised $110 million.

Fintech mergers and acquisitions in the U.S. remained weak during the second quarter, following a strong 2016. The report said this was possibly the result of the M&A market’s cyclical nature.

“The U.S. continues to lead the way in fintech investment and the future looks bright — especially long term — as the startups shift their thinking, and expand their geographic reach and their core capabilities,” Anthony Rjeily, leader for KPMG’s financial services’ digital and fintech practice in the U.S., said in the statement.

“However, in the short term there could be caution as a result of macroeconomic issues and the expectation of rising interest rates.”

The report said interest in software-as-a-service fintech solutions has grown in recent quarters and is expected to accelerate in the months ahead.

Over the next couple of years, it said, there is likely to be an even more aggressive push toward apps into the cloud, particularly as financial regulators become more comfortable with cloud-based services.

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