Canadian fintechs face pivotal year after investment fell in 2023

Investment in Canadian fintechs slowed significantly again last year as the number of deals dropped by more than half and values fell nearly 30 per cent, finds KPMG’s latest global Pulse of Fintech report. The Canadian results mirror declining investment globally, which saw deals fall 65 per cent and values plummet 73 per cent.

Investment in Canadian fintechs dropped to US$920 million across 109 total deals in 2023, down from US$1.29 billion invested across 208 deals in 2022, according to KPMG’s Pulse of Fintech H2’23. The report includes venture capital, private equity and mergers and acquisitions data compiled by PitchBook.

It is the second consecutive year in which investment dropped since reaching a record high US$7.15 billion in 2021 across 225 deals. Georges Pigeon, a partner in KPMG in Canada’s deal advisory practice, expects 2024 will be a pivotal year for Canadian fintechs as larger incumbents accelerate innovation and growth while less mature fintechs face financing shortfalls as they come close to drawing down on capital raised 18-to-24 months ago.

“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,” he says. “Fintechs that can demonstrate they are sustainable and valuable businesses will have an edge over those that emphasize themselves as quick technology solutions providers.”

Mr. Pigeon says investment activity will remain sensitive to interest rates and should pick up once the Bank of Canada starts making cuts. He also expects the federal government to introduce open banking legislation in its upcoming budget further boosting investor confidence in the Canadian sector.

“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,” he adds.

Venture capital-backed investments accounted for more than three quarters of all deals (with 83 VC-backed deals worth US $711 million), of which more than two thirds were early-stage or seed investments.

For the second year in a row, there were more investments in the cryptoassets and blockchain space than any other vertical, with 31 deals in total. Software-as-a-service (SaaS) oriented fintechs saw 24 investments, and artificial intelligence and machine learning garnered 15 investments.

Edith Hitt, a partner in KPMG’s advisory practice who specializes in banking technology, says investor interest in cryptoasset fintechs was sustained in part by the anticipation of the Securities and Exchange Commission’s (SEC) approval of a Bitcoin Exchange Traded Fund (ETF). “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,” she says.

Ms. Hitt adds the fact that one of the largest investments in Canada last year was a blockchain infrastructure company signals growing interest in the technology.

“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,” she says. “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.”

The number of late-stage and corporate venture capital investments is also a positive sign for Canadian fintechs, she says. Combined, they accounted for 41 per cent of all fintech investments.

“There are many well-established fintechs in Canada that are generating healthy revenues and expanding rapidly, and that bodes well for the future of Canada’s fintech ecosystem,” Ms. Hitt says. “Combine that with a strong technology talent base, world-class post-secondary institutions, and a well-supported innovation agenda and the long-term outlook for Canadian fintechs is positive.”

The drop in Canadian fintech investment was mirrored in other major markets around the world, with US$113.7 billion invested across 4,547 fintech deals globally last year, down from $196.6 billion and 7,515 deals in 2022. A confluence of factors, including market cycle moderation, slower economic growth, market volatility, higher capital costs and geopolitical tensions led to subdued global investment.

In the Americas, US$78.3 billion was invested across 2,136 fintech deals in 2023, down from $95.4 billion and 3,467 deals in the previous year. The U.S. accounted for a majority of all North American investments, with US$73.5 billion invested across 1,734 deals. Eight of the top 10 largest fintech investments in the world last year were in the U.S., and two were from the United Kingdom.