Key takeaways

• Regulations

  • US regulators propose laws to improve crypto-related tax compliance and safeguard investors: Following a flurry of regulatory developments in the cryptocurrency space during the first half of 2023, the US Treasury Department brought in a series of new regulations to streamline cryptocurrency tax reporting and clamp down on crypto users who may not be paying taxes. The Treasury Department also seeks to enforce additional disclosure requirements for digital asset brokers—similar to regulations applied to traditional financial instruments—from the 2026 tax filing season.  While GenAI picks up steam, the SEC proposed new legislation during the quarter to limit the use of AI and predictive analysis by investment firms and brokerages in a bid to safeguard consumer interests. These regulations mandate firms to maintain written policies, procedures, and records concerning AI use to prevent violations and breaches of consumer protection laws.

• Funding

  • Funding levels recover, boosted by mega debt deals: FinTech Services saw total funding improving 46% YoY to USD 9.5 billion in Q3 2023 (compared with USD 6.5 billion during Q3 2022). The sector witnessed 17 mega deals (USD 100 million+), which collectively raised more than USD 8.2 billion (~86% of total). Finastra, a FinTech Infrastructure startup, secured the largest amount of funding during the quarter, raising USD 5.3 billion in private debt, making it the highest private credit transaction in the history of the US.

• Product updates

  • Incumbents actively rolling out digital services: During Q3 2023, we counted 50+ product launches, most of which focused on enhancing current services, as well as new launches from incumbents primarily in the Banking and Infrastructure, Wealth Tech, Sustainable Finance, and InsurTech sectors. Notable incumbent activities include Citi launching a digital platform for its commercial clients, Sumitomo Mitsui Financial Group launching its US digital banking unit, Jenius Bank, and MassMutual rolling out a new health app for its term life policyholders, providing incentives to those exhibiting healthy lifestyles.

• Partnerships

  • Banking and Infrastructure partnerships most common, with a focus on expanding product offerings: Similar to product updates, partnership activity focused on launching new products or features that enhance the existing product portfolio as well as expand customer reach. The most partnership activity was within Banking and Infrastructure, followed by the InsurTech vertical. In addition, incumbent activity remained strong, with notable partnerships between Mastercard Ripple, Consensys, Fluency, Idemia, and Fireblocks to form the Mastercard CBDC Partner Program, aimed at improving central bank digital currency adoption and enhancing interoperability.

• M&A

  • We counted 19 M&A transactions within the FinTech Services vertical in Q3 2023. Most were primarily aimed at adding new products and services to expand and bolster their product portfolios as well as capitalize on licenses for geographical expansion.

• Outlook

  • VC funding continued to dry up, with funds reserved for profitable and more promising deals: With US inflation still above the Fed target (the CPI was 3.7% for the 12-month period ended August 2023 compared with an annualized target of 2%), high interest rates are expected to persist for an extended period. Companies seeking to raise funds will no longer have access to cheap funding and would need to secure funds at marked-down valuations. Furthermore, VC appetite is likely to shift toward early-stage startups due to the potential for higher future returns, as well as those that demonstrate strong profitability, as opposed to those with greater growth prospects. In addition, companies are expected to further tighten their belts and take measures to limit cash burn while focusing on products with the highest ROI.
  • M&A activity to remain strong as companies seek to acquire products and market share: Companies are likely to take advantage of low valuations to acquire businesses to rapidly expand their market share and expand into new products in a bid to diversify their revenue streams. This is also being driven in part by the expensive financing environment, where companies are under pressure to find new revenue streams and overcome high customer acquisition costs.