Key takeaways

• Regulations

  • Regulators focused on promoting transparency and consumer protection with specific disclosure requirements and stringent record-keeping for non-bank players: The US Consumer Financial Protection Bureau (CFPB)'s proposed rule to classify paycheck advance programs as consumer loans aims to ensure that workers understand the fees involved, addressing potential concerns around hidden costs. Similarly, the US Federal Deposit Insurance Corporation (FDIC)'s new rule on third-party deposits strengthens record-keeping and reconciliation practices, which is critical to safeguarding consumer funds and maintaining trust in non-bank financial intermediaries. These regulatory moves highlight a growing emphasis on stricter oversight for non-bank players, ensuring that they meet higher standards of disclosure and security. This would ultimately promote a safer, more transparent financial ecosystem.

• Funding

  • Overall funding volumes declined sharply amid investor caution: We tracked a decline in funding volumes in the FinTech sector in Q3 2024. Funding totaled USD 3.3 billion, representing a 69% decrease YoY and a 50% decline QoQ. This marks the lowest funding recorded over the past 12 months, as all sub-sectors within the space faced similar declines. The decrease can also be attributed to fewer completed mega deals, with only nine finalized, compared with 17 in Q3 2023. This softening of the investor climate can be a result of increased caution among investors who anticipated rate cuts for most of the quarter alongside political risks from the upcoming US elections.

• Product updates

  • Complementary offerings rose alongside AI-related product launches, driven by automation and insights: AI-related product launches sustained their momentum in Q3 and were prominent in the Business Expense Management, Capital Markets Tech, Financial Wellness Tools, and InsurTech: Infrastructure industries, primarily targeting customer needs for automation and insights. Notable solutions included financial coaching chatbots from BrightPlan and Pocketnest to provide individuals with tailored financial advice, fully automated accounts payable platforms from Airbase and Stampli to eliminate discrepancies and enhance the accuracy of matching POs, and enhanced insurance claims management tools from Five Sigma and CLARA Analytics to reduce claims processing times and cost for the carrier and claimant. 

• Partnerships

  • Activities centered around enhancing existing product portfolio: Most partnerships within FinTech aimed to forge alliances to develop and/or add new features to complement existing offerings and expand market reach. However, compared with previous periods, we saw a decline in AI-related partnerships this quarter. The FinTech: Banking & Infrastructure sector accounted for the most partnerships, with notable activities being Google Cloud and Sionic partnering to launch a comprehensive fraud detection and mitigation service and Ford launching a new usage-based auto insurance for commercial customers in partnership with Pie Insurance.

• M&A

  • Existing offerings were enhanced through bolt-on acquisitions, a key driver of M&As: In Q3 2024, we counted 15 M&A transactions in the FinTech sector, a slight decline from 22 deals in the previous quarter. The primary motives for these deals were enhancing existing offerings and expanding into new geographies. The most valuable deal was Paylocity’s acquisition of Airbase for ~USD 325 million to expand its payroll and human capital software solutions to include business expense management.

• Outlook

  • AI- and GenAI-related product launches and collaborations remain a key priority for FinTechs: The sector is primed for significant integration of these technologies, supported by recent developments, such as TranscendAP’s release of the latest version of its AI-powered accounts payable automation platform and BrightPlan's introduction of an AI-driven financial wellness coach. We think more FinTech firms will adopt these solutions into both internal workflows and customer-facing operations, aiming to enhance efficiency, improve service quality, and better meet customer needs. Immediate applications are likely to include the development of chatbots that leverage proprietary and customer data to enhance customer service. A KPMG survey in March 2024 also highlights that nearly 40% of bank leaders expected 6%–20% of their team’s daily tasks to be executed by GenAI by the end of 2024, and 65% of bank executives indicated that GenAI would be a key part of their long-term innovation strategies.
  • Funding volumes likely to rebound from Q4 2024 onward, despite temporary dip: In Q3 2024, funding volumes declined following two consecutive QoQ increases. This downturn—expected to be temporary—was largely owing to a cautious wait-and-see approach among investors, who anticipated rate cuts amid rising geopolitical risks. However, with the Federal Open Market Committee (FOMC) reducing interest rates by 50 basis points in September 2024, the FinTech funding landscape is expected to improve. We also anticipate a shift toward equity financing rather than the debt funding that has dominated in recent quarters, especially across mega deals. According to a Silicon Valley Bank report, VC appetite is likely to favor early-stage startups (due to the potential for higher returns) and those demonstrating strong profitability. 
  • Startups to focus on IPO readiness, with potential listings expected in 2025: After a lackluster year for FinTech IPOs in 2023, characterized by declining valuations, many startups and investors are now looking toward public listings as market conditions begin to improve. The easing of monetary policy is likely to boost valuations, but uncertainty surrounding the upcoming US elections and concerns over a potential soft landing may delay a surge in IPOs until 2025. Companies such as eToro, Klarna, Monzo, WeBull, and Zilch have announced plans to go public within 12–24 months. Additionally, an uptick in M&As within the sector is likely driven by investors seeking opportunities in distressed assets (as seen with Klarna’s acquisition of Laybuy this quarter) and companies looking to consolidate market share.