Payments called 'dominant driver' for fintech investment: KPMG

Dive Brief:

Corporate venture capital flowed into fintech companies worldwide at an “incredibly strong” pace during the first half of 2021, with a record $20.8 billion channeled to firms specializing in payments, cybersecurity, blockchain, crypto-currency, insurtech, regtech and wealthtech, according to a report by KPMG.
“Corporates around the world are under pressure to increase the velocity of their digital transformation activities and to enhance their digital capabilities,” KPMG said. “Over the last year, many have seen that it’s quicker to do so by partnering with, investing in or acquiring fintechs, particularly with respect to high demand skills.”
Worldwide investment in fintech through private equity, venture capital, and mergers and acquisitions totaled $98 billion for the first six months of 2021, outpacing the $34.4 billion tallied for the first half of last year, the KPMG report showed. The total for the first half of this year suggests 2021 is on track to outstrip the $121.5 billion channeled to fintech for all of last year. In the U.S., $42.1 billion was invested for the period.

Dive Insight:

Companies and investors are pumping money into fintech companies worldwide due to a rising concern regarding cybersecurity and an increasing interest in digital payments, blockchain and crypto-currencies. There is a “growing recognition that the consumers’ digital behaviors that accelerated due to the global pandemic are here to stay,” KPMG said in the report.

“While the payments space is expected to remain a dominant driver of fintech investment, revenue-based financing solutions, banking-as-a-service models, and B2B services are expected to attract increasing levels of investment," KPMG said in an Aug. 10 press release delivering the report. "Given the rise in digital transactions, and the subsequent increase in cyberattacks and ransomware, cybersecurity solutions will likely also be high on the radar of investors.”

Many non-financial companies are expanding into payments and other financial services, KPMG said. For example, IKEA during the first half of 2021 bought a stake in Ikano Bank to provide consumer banking services and Walmart allied with Ribbit Capital to offer digital financial products.

Also, Walgreens announced a partnership with MetaBank to offer bank accounts, including debit cards issued by MasterCard and the use of a banking-as-a-service platform by InComm Payments.

During the second half, KPMG expects more growth in “pay-by-bank” services and “buy now, pay later” offerings.

Companies across a range of industries will probably increase efforts to fend off cyber attacks, pushing up investment in cybersecurity firms to a record by year-end, KPMG said. “Given the rise of ransomware and other cyber attacks, there is an increasing focus on the ability of companies to quickly detect malicious attackers,” the report said.

Blockchain and crypto-currency firms were also a favorite target for corporate venture capital, KPMG said.

“A number of corporates in the U.S. made big bets on cryptocurrencies” during the first half of 2021, KPMG said, noting that Facebook advanced plans to launch Diem, a stablecoin, before the end of the year and Paypal acquired Curv, a crypto-security firm.

From January through June, “we saw interest in fintech grow to a fever pitch,” KPMG said. The trend will likely persist through the last half of 2021, fueled in part by the increasing popularity of partnerships and growth in B2B services such as banking-as-a service.

“M&A activity will likely grow considerably as corporates look to expand their capabilities and offerings and fintechs look to scale,” KPMG said.