The
Global fintech funding in 2023 fell 50% year-over-year, to $39.2 billion, according to
Amid the ongoing gloomy outlook for VC funding — further depressed by a cooler economy — investors have spotted a few significant factors that gave payments a softer landing as fintechs came down from the late 2021 peak in
"There was a seismic pivot at the back end of 2022 and early last year when investors suddenly grasped the fact that the growth-at-all-costs era of fintech funding was over, and firms will now have to show proof of a revenue model that can work while the company scales," said Hugh Tallents, a senior partner in the corporate consulting firm cg42.
Payments VC funding this year will likely revolve around restaurant payments technology, digital wallets, innovations supporting buy now/pay later lending models and the spread of digitized payments to business-to-business channels, Tallents said, adding that investment activity is likely to remain muted compared with two years ago.
The handful of standout VC deals in the payments sector late last year built on existing momentum and market strength.
Montreal-based payments processor Nuvei is still on a roll, having announced plans in November to buy Australia-based Till Payments for $30.5 million, several months after
"A lot of asset managers are moving back into private equity so they can grow companies behind the veil of the private markets, without the scrutiny of the public markets, while not even looking at IPOs as the primary exit vehicles — they're either looking for a direct sale to a public or private firm, or trying to sell tranches of their concept to tertiary investors," Tallents said.
Some observers expect to see VC funding flow to payments at about the same rate this year as last year, with some healthy M&A activity in the sector.
"I think there will be some opportunistic deals, but largely smaller ones," said Gareth Lodge, a senior analyst at Celent. The challenge he sees is that payment entrepreneurs' and investors' expectations remain unrealistically high, in part because of the need for returns on sums already paid or invested, he said.
Deals offered last year at higher prices got no takers, and payment startup valuations and the appetite for risk have further declined since then, Lodge said, adding, "I do think M&A will return, but I'm not sure it will be at the same pace and volume, and I don't know who the buyers will be."
The payments sector is likely to eke out more funding than other types of fintechs again this year because payments startups tend to move concepts to market faster than many others, said Carey Ransom, managing director at Sandy, Utah-based
Maturing venture-backed payments startups and fintechs are the likeliest candidates for acquisition this year, especially as valuations fall "to a more sensible level where buyers can make the math work for accretive value," Ransom said.
Early-stage payments startups seeking fresh capital and product distribution channels are still ripe for acquisition by fintechs or financial institutions with a specific market need, he noted, but buyers will be highly selective.
Dave Unsworth, general partner and co-founder of Toronto-based
"Payment startup valuations have adjusted to what they were prior to 2021, and with that comes expectation-adjustment for both founders and investors. But there are big opportunities within this space for more venture funding, especially for those with strong and differentiated value propositions," Unsworth said.
One such example of the kind of payments startup that got VC funding in last year's cooler atmosphere is GoTab, an Arlington, Virginia-based restaurant payments-tech startup that launched in 2016 building a mobile payments platform from QR codes.
In August 2023,
"There's actually a lot of cash on the sidelines and investors are willing to put money into payments startups, but they're going to be very strategic going forward — the era of people throwing money into fintechs for potentially fictitious future earnings is over," Tallents said.
