FinTech Funding Hits 8-Year Low as VCs Embrace AI
When it comes to getting funded, FinTechs are having trouble competing with artificial intelligence.
New data from S&P Global Market Intelligence released Monday (March 3) showed that the sector attracted $21.5 billion in venture capital (VC) investment last year, the lowest level of funding since 2016.
Several factors fueled the decline, including a drop in FinTech valuation and slowing growth rates, including in terms of factors like headcount, the report said. It has led many VC investors to turn their focus to companies in generative AI.
“With AI ‘revolutionizing’ multiple industries, venture capital is flowing where the next big breakthrough is expected,” John Clark, partner with FinTech-centric investment bank Royal Park Partners, said in the report.
The 30 FinTechs that drew last year’s largest funding rounds also saw their headcounts stagnate in late 2022 and early 2023, per the report. When growth resumed in the middle of 2023, the median year-over-year growth rate continued to fall, dropping from 82% in December 2021 to 10% three years later.
“Young companies are under pressure to demonstrate leaner operating costs and a clear path to profitability,” Sophia Furber, a FinTech analyst at 451 Research, a technology research group that is part of Market Intelligence, said in the report.
Late last year, HSBC Innovation Banking found that VC funding in the United States had moved to AI firms at an “unprecedented” rate, with the scale of investment in those companies approaching that allocated to the rest of the venture market.
According to HSBC, 42% of U.S. venture capital was invested in AI companies in 2024, up from 36% in 2023 and 22% in 2022, with 20 AI companies having each raised at least $2 billion.
“Venture capital has always gravitated toward transformative industries, but the level of consolidation we’re seeing within one category is unprecedented,” HSBC U.S. Innovation Banking Head Dave Sabow said at the time.
Meanwhile, Will Artingstall, head of digital asset payments and eCommerce services at Citi Services, told PYMNTS in an interview posted last week about the challenges facing FinTechs.
“It’s not just the old nature of FinTechs competing with FinTechs,” he said. “What you’re often now starting to see is neobanks entering the space. You’re seeing banks themselves offering more digital services.”
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