The Domino Effect of Fintech Funding Decline

The global fintech market is facing challenging conditions, with several factors impacting its growth. The sector has seen a decline in funding which has been accompanied by a decrease in venture capital investments overall. Venture capital funding of fintech start-ups has plunged globally by 49% year over year to $23 billion in the first half of 2023 amid an economic downturn, according to S&P Global Market Intelligence data.

In July, KPMG released its Pulse of Fintech H1 2023 report. Here are some of its key findings:

•  Global fintech funding fell to $52.4 billion in the first half of 2023 down 17% from $63.2 billion in H2 2022.
  
  
•  In the first six months of the year, the Europe, Middle East and Africa (EMEA) region saw a decline in fintech funding, with only $11 billion raised compared to $27 billion in H2 2022.
  
  
•  The Asia Pacific (APAC) region also experienced a drop in funding, from $6.8 billion in H2 2022 to $5.1 billion in H1 2023, a significant decrease from the more than $45 billion raised in H1 2022.

These trends reflect a challenging period for global fintech funding, as investors have become more hesitant about supporting and funding start-ups, especially given the unstable market conditions.

However, the US remains a major investor, accounting for more than two-thirds of the $52.4 billion in global funding. 

According to the report, payments remain the top fintech sub-sector, with supply chain and logistics and green fintech seeing record annual highs in funding. KPMG predicts a continued interest in artificial intelligence (AI), as companies around the world look to leverage its potential.

Risks to the market

Unfortunately, KPMG predicts fintech funding to remain relatively low in the second half of the year (H2 2023). The report names risks such as high inflation, rising interest rates, geopolitical tensions, and tech sector challenges as potential threats to the market.

These risks, combined with the decline in funding, have raised the likelihood of bankruptcy in the fintech sector. This increased risk of potential bankruptcy is concerning for financial institutions and other businesses that rely on fintech services. The knock-on effect for those who rely on fintech services can be detrimental, with some experiencing disruptions or complete failure of those services, ultimately affecting their critical operations.

Businesses need to take a proactive approach to mitigate the risks of supplier failure, to safeguard critical operations and ensure business continuity. This is being highlighted in recent updates to financial services regulations, including PRA SS2/21 and US banking regulations.

Protection Through Software Escrow

For over 30 years, software escrow arrangements have been adopted by software customers to ensure business continuity, as well as by software vendors to provide peace of mind to their customers.

As businesses, including financial institutions, adopt technology to enhance and adapt their operations, it is crucial to have a business continuity plan in place in case their critical software providers encounter financial difficulties.

To protect against the impacts of supplier failure, businesses should consider implementing an escrow agreement supported with verification.

Software escrow provides access to the source code of their software. By securely storing the software source code and materials with an independent third party (the escrow services provider), it ensures that the materials can be accessed and released if the need arises. For example, if a release condition is met – such as bankruptcy and supplier failure – the escrow deposit is released to the software customer. The source code can then be used to recreate and maintain their business-critical software application, either with in-house resources or by engaging with another supplier.

As fintechs compete to secure funding and establish themselves as dominant players in the industry, building resilience into software solutions is essential to enhance their proposition, gain a competitive edge and attract investment. Fintechs should consider protecting their solutions with software escrow to offer assurance to both customers and investors that their solutions are future-proof and capable of withstanding disruption.

From a software vendor perspective, the idea of implementing software escrow for their application for multiple customers may seem daunting, but there are options that are specifically designed with the vendors in mind to allow them to scale up their escrow protection across their licensee base.