Investment in fintech globally falls nearly 50% in 2016 but PSD2 could be catalyst for new funding, says KPMG

KPMG said, however, that new EU laws on payment services could spur new fintech funding during 2017.

It flagged the potential influence of the revised Payment Services Directive (PSD2) on fintech investment as it noted that fintech companies raised $24.7 billion in funding in 2016, down from $46.7bn in 2015.

KPMG said: "[PSD2] will be a significant game changer for the banking and finance industry. PSD2 will require that financial institutions provide third-party providers will access to their customer account information using APIs in order to improve banking services and for consumers. This shift will allow third parties to use banking architecture and data to provide tailored services."

"Leading into 2018, investments in cross-industry platforms that can help achieve the end goals of PSD2 for consumers will likely be a hot area, particularly for banks looking to deliver a more integrated experience to consumers. There will also likely be an increase in niche fintech companies that can leverage the outcomes of PSD2 to create specialised offerings that could not be profitable without the open data mandate," it said.

PSD2, together with a drive towards open banking, will likely spur "increased investor interest in complementary technologies, such as data and analytics", it said.

The KPMG report (97-page / 2.94MB PDF) also highlighted substantial growth in investments in insurance technologies (insurtech) during 2016, and predicted insurtech would "remain hot" in 2017.

"Many traditional insurance companies have been hampered by legacy IT systems and regulatory transformation programs which means there have been limited funds to invest in innovation," KPMG said. "This has left the industry somewhat behind others in the financial services sector, making the industry ripe for disruption. Over the past year, a number of early movers in insurtech have also matured and started attracting larger funding rounds. This has helped put the sector firmly on the radar of investors. There has also been a proliferation of accelerator programs aimed at encouraging insurtech innovation over the past year."

"Heading into 2017, interest in insurtech is expected to remain hot across all regions of the world. Most insurtech investments will likely focus on companies specialising in individual components of the insurance value chain (e.g distribution, underwriting, claims, customer service), although there may be some that follow the lead of Lemonade and Trov: two early-mover, full-service digital insurance providers," it said.

"Investment from corporates is also expected to grow as traditional insurers look for technologies that can help them respond to the evolving demands of their customers. Interest in cross-industry technologies that can be applied to the insurance sector – such as healthtech, automotive telematics, Industry 4.0, and the expanding use of commercial drones – is also expected to high for the foreseeable future," KPMG said.

The report also identified artificial intelligence (AI) as an area that is likely to attract corporate investors during 2017, and predicted that global technology companies would also grow their interest in "fintech opportunities" this year.

"Already, companies like China-based Alibaba Group are targeting promising fintech companies as a means to expand globally," KPMG said.