The Irish fintech industry secured $68.6 million* in M&A, venture capital and private equity transactions across ten deals in the second half of 2020, according to the latest KPMG Pulse of Fintech H2’20, a bi-annual report tracking global fintech VC, PE & M&A investment trends.
The investment secured in H2’20 falls below H2 totals in previous years, of $104.8 and $97.9 in 2019 and 2018 respectively. It follows a record start to 2020, where $328.6 million was secured by Irish companies in VC, PE and M&A, dominated by the landmark $162 million acquisition of Irish-founded Prepaid Financial Services by Australia’s EML Payments**, which was the largest strategic M&A deal of fintech globally in the first half of 2020.
While investment in the second half of 2020 started slowly, with $4.2 million recorded in Q3’20, it rebounded in Q4 to $64.4 million, with Dublin-based global payroll solutions provider, Immedis, landing $50 million in early stage venture capital investment from Lead Edge Capital, to support its growth in US and APAC markets. The second largest investment was secured by e-commerce financing and marketing analytics start-up, Wayflyer, which raised $10.2m.
Irish fintech companies may have proved particularly attractive in the period in light of Brexit, given the requirement for all UK licensed banks to be licensed in an EU jurisdiction in order to service their EU based clients.
Speaking on investment in Irish fintechs in 2020, Anna Scally, Partner and Fintech Lead at KPMG in Ireland said, “Despite the anticipated dip in H2’20 in light of the pandemic, Ireland remains well positioned to see increased fintech investment post-Brexit from banks and financial institutions choosing Ireland as the base for their European operations. As well as this outside interest, fintechs are shaking up the marketplace domestically with incumbent banks really recognising the force of their competition. We’re seeing banks react to make their lending processes more efficient and we will likely see financial institutions forging more partnerships with early-to-late stage fintechs to accelerate their digital transformation efforts. The Irish fintech eco-system is perfectly positioned to provide solutions for institutions which need to adapt quickly and adopt much more streamlined lending processes. This is imperative in order for them to deliver on their digitisation agendas and remain relevant for their clients, particularly SMEs, many of whom are now in trouble as a result of COVID-19.”
“A caution for 2021 will be whether smaller fintechs and start-ups will get left behind. Trends indicate that market activity is very focused on big deals with larger Irish players who are already competing successfully on the global stage. Earlier stage companies will struggle to scale without investor backing and this will have a knock-on effect for many years to come.”
Regulatory Technology, or ‘regtech’, where companies provide a technology-driven service to facilitate and streamline compliance with regulations and reporting as well as fraud protection, will remain an opportunity for Irish companies in the year ahead. Globally during 2020, interest in regtech solutions skyrocketed as companies working to digitise processes quickly to support shifting business and consumer demands looked for efficient and cost-effective ways to manage their regulatory requirements in a shifted business environment. This growing interest drove regtech funding to $10.6 billion, well above the previous high of $6.5 billion seen in 2018.
The ESG (Environmental, Social and Governance) agenda is also expected to become more important component of regulation this year, following signalling from the European Banking Authority (EBA) in November 2020, that the incorporation of ESG factors and risks will eventually be included in the regulatory and supervisory framework for credit institutions and investment firms.
Corporate investment in fintech remained very strong in H1’20, accounting for $12.2 billion in investment across participating deals globally. The US was particularly notable as it saw a record high of over $2.4 billion in corporate investment in Q1’20 – a number almost matched in Q2’20. Corporate investment is expected to remain very strong heading into H2’20, in part due to the strategic nature of investments driven by corporates making investments in digital channels and products in order to serve their customers better in the COVID-19 era.
Europe drove the vast majority of fintech investment in EMEA, even as the fintech ecosystems in the Middle East and Africa continued to evolve. A record Q3’20 of over $3 billion helped propel EMEA to an annual record high of $9.3 billion.
Payments companies and challenger banks were very hot with VC investors in EMEA, a trend that accelerated given the digital acceleration seen as a result of the pandemic. In H1’20, three companies raised $500 million+ rounds, including Sweden-based Klarna ($650 million), Poland-based Polskie ePlatnosci ($587 million), and Revolut ($580 million).
Numerous governments and regulators across Europe, including the UK, Germany, France and Sweden, have worked to develop their fintech ecosystems — and others are following in their footsteps. In H2’20, Spain announced a regulatory sandbox in order to spur its own fintech development.
As VC, PE & M&A investment trends from 2020 show, many investors took the time to focus on their current portfolios in order to make sure they could perform well. With Brexit completed as of December 31, 2020, there is strong optimism for the fintech market in 2021 – with expectations that M&A activity will rebound to a large degree.
Operationally, COVID-19 has greatly impacted the demand for digital services – it’s anticipated that financial industries will continue massive investments in digitising front and back office activities. Automation and digitization will be key for reducing processing costs and improving customer experience for incumbent players. As such, collaboration between established players and fintechs will be a trend to watch in 2021 as the industry responds to shifting consumer needs. Consolidation among fintechs in order to bring the strongest players, technology platforms, and customer experience technologies together.
* All figures in USD
** Prepaid Financial Services’ is headquartered in London and therefore using PitchBook’s methodology is included in UK figures in the wider report. It is included in the Irish figures in this press release as the company has a front office in Ireland and was founded by Irish entrepreneurs.
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For further information on this edition of Pulse of Fintech, please contact Anna Scally, FinTech lead.