After growing 25 per cent a year since 2014, venture capital investment in the fintech sector dropped by 11 per cent globally in the first half of 2020, according to a McKinsey report.
The report, Detour: An Altered Path to Profit, said the European market has been the hardest hit, with a 30 per cent fall in investment in the first half of the year, compared with the same period in 2019 (the report did not provide figures for Australia).
The reason is that although fintechs offer a different customer value proposition to large banks, they are still subject to the same economics as the broader banking sector. The pandemic is expected to have a significant negative impact on industry profitability.
McKinsey said: “This constitutes a significant challenge for fintechs, many of which are still not profitable and have an ongoing need for capital as they complete their innovation cycle.
“While the VC and growth investment community will continue to back some companies, they cannot meet the aggregate demand on their own.”
Some governments have stepped in to provide support. The UK government has set up a Future Fund to invest in growth sectors of the economy and has disbursed £320 million through a loan scheme that matches venture funds raised.
McKinsey said such measures are a stopgap and the European fintech sector needs €5.7 billion of funding to get through the next 12 months.
It said the corporate investors may play a greater role. Last month, American Express acquired a US small business lender Kabbage and earlier in the year and in the UK Metro Bank acquired RateSetter.