KPMG in Canada says industry faces a pivotal year amid global challenges
Investment into the Canadian fintech industry suffered decline in 2023 with deal volume halved and values dropping 30% compared to the previous year, so what now?
A new report from KPMG in Canada says that this year will be pivotal for the industry with the challenges domestically actually looking more manageable in context of the global picture. Worldwide investment in fintech slumped 65% in deal volume terms and 73% for values with $113.7 billion invested across 4,547 deals, down from $196.6 billion and 7,515 deals in 2022.
For Canadian firms, 2023 saw just 109 deals compared to 208 in 2022, with investment of US$920 million, down from $1.29 billion in the previous year. The stats are derived from Pitchbook venture capital, private equity, and M&A data.
Venture capital accounted for more than three quarters of all Canadian fintech deals in 2023 with more than two thirds early-stage or seed investments.
SaaS and AI/machine learning fintechs were among the most popular last year with 24 and 15 deals each, but cryptoassets and blockchain saw the largest single industry focus (31 deals) with the SEC approval of spot bitcoin ETFs likely to have played a part in this.
"The approval of a Bitcoin ETF in the United States could help boost investment in Canadian fintechs and help drive new technological advancements in the digital assets space," said Edith Hitt, a partner in KPMG's advisory practice who specializes in banking technology.
Blockchain is also growing in importance as part of the digital landscape.
"Notable investment in blockchain infrastructure suggests that investors could be thinking ahead to the future, where a central bank digital currency or 'digital dollar' might one day become a reality in Canada," added Hitt. "If that happens, blockchain could potentially be the infrastructure that's used to underpin that system, and that could be another growth catalyst for Canada's fintech ecosystem."
While the year-over-year decline is significant, it is part of a larger plummet for the Canadian fintech industry. In 2021, investment was a record high $7.15 billion from 225 deals.
And the next year is likely to see uneven investment, with larger fintechs able to accelerate their innovation and growth, while smaller firms struggle to attract the funding they need to push forward, unless they can make a compelling case to entice investors.
"The next six-to-eight months will continue to be slow for fintech investments, which will make it difficult for fintechs that require funding in the near term and force them to rethink how to position themselves to investors," said Georges Pigeon, a partner in KPMG in Canada's deal advisory practice. "Fintechs that can demonstrate they are sustainable and valuable businesses will have an edge over those that emphasize themselves as quick technology solutions providers.”
The challenge for fintechs is exacerbated by rate sensitivity, but Pigeon believes that investors will come off the sidelines when the BoC commences cuts.
Another accelerator for the industry would be open banking, assuming that the federal government introduces legislation – which could be in the upcoming budget – giving investors a confidence boost in fintechs.
"Open banking could be a catalyst for fintech investors, but the impact won't be immediate. It'll take time for Canadians to adopt and embrace open banking, and that will influence how investors approach fintech investment opportunities in Canada," said Pigeon.