A combination of geopolitical uncertainty, high inflation and low interest rates has seen investment in the UK's fintech industry slump to its lowest level since 2020.
In 2024, UK fintechs attracted £7.97bn, much lower than the £10.95bn invested in the previous year, according to KPMG's Pulse of Fintech report.
Yet, despite the decline, the UK still led the rest of Europe in terms of fintech funding and attracted more investment than France, Germany, China, India, Brazil and Canada combined.
The UK accounted for close to half of all fintech investment for the entire EMEA region.
The largest deal in the UK was the £215M venture funding round by money transfer provider Zepz in H2’24.
The KPMG report described 2024 as a "challenging year", for the EMEA region as well as the UK. Total invesment in EMEA fell from £21.5bn in 2023 to £16.3bn. The second half of 2024 saw funding decline by almost 50% - from £10.5bn to £5.8bn.
However, according to Hannah Dobson, UK fintech lead and partner, indirect tax at KPMG, said there are signs of a "slow recovery in deals" thanks to a reduction in interest rates and the promise of more political stability.
Yet, this has to be set against the ongoing challenge of regulation, particularly as regards the use of AI, the rules for the BNPL market and the crypto sector given that the EU's AI Act and Markets in Crytpto Assets (MiCA) Act came into force in the second half of 2024.
"Despite the drop in investment, the UK remained the capital of European fintech in 2024, attracting almost half the entire funding of the EMEA region. We expect UK investment to remain relatively soft in the first half of this year, although it will likely begin to pick up as interest rates reduce further, with common consensus that this will be in Q3/Q4," said Dobson.
In contrast to the majority of EMEA, the Middle East bucked the currernt trend with fintech investment almost doubling from £0.9bn to £1.7bn in 2024.
The report also suggests that the number of secondary transactions once fintechs reach profitability is set to increase, given the challenges in capital markets and the number of investors looking to liquidate their positions.
In terms of fintech subsectors, payments continuied to be the main destination for investment, with global investment rising to £25bn in 2024, up fron £13.8bn in 2023.
"Payments continued to be the rockstar of the fintech subsectors, driven by late-stage deals and an increasing focus on consolidation, and regtech gained a lot of traction. As we’re starting to see more deals coming through because of interest rate cuts in different jurisdictions and the lower cost of funding, the future is looking more promising for fintechs globally," said Karim Haji, global and UK head of financial services.