Fintech companies are facing a challenging environment in 2024 due to high interest rates and heightened regulatory scrutiny, but they are also discovering new opportunities, according to the latest Future of Fintech Report from Silicon Valley Bank (SVB), a division of First Citizens Bank.
Despite a sharp decline in venture capital (VC) investment, with funding levels near a six-year low, early-stage deals are providing a lifeline to the sector.
The report highlights the increasing role of artificial intelligence (AI) as a promising area for growth, as both investors and founders explore its potential in the fintech space.
The report offers a comprehensive analysis of the fintech industry, noting that overall VC investment in the sector has dropped dramatically.
Fundraising by fintech-focused VC firms has plummeted 91% from its peak in 2021, with only $5 billion raised through September 2024.
While this reflects a significant contraction, the report suggests that the focus has shifted to earlier-stage deals, with three seed-stage deals being completed for every series A investment.
Larger deals have become rarer; transactions over $100 million, which once accounted for 65% of deal activity in 2021, now represent just 34% in 2024.
Artificial intelligence has emerged as a bright spot in this constrained investment landscape.
Mentions of AI in fintech corporate earnings calls have increased fourfold since 2021, indicating the growing interest in integrating AI technologies into fintech services.
The report highlights two key trends: AI-native companies are leveraging AI tools in the development of new products, while legacy fintech companies are increasingly using AI to reduce operational costs, particularly in human capital.
AI-native fintech companies are proving to be more efficient in terms of value creation, with median investment returns of 4.0x in 2024 compared to 2.7x for legacy fintechs.
This efficiency is driving greater interest in AI-driven innovations, especially in applications such as customer service automation and productivity enhancement, as well as more finance-specific uses like risk management and fraud detection.
Despite the challenges, the report suggests that the fintech industry is on the path to recovery, with broader investment activity expected to rebound in 2025.
SVB notes that U.S. fintech companies are becoming more financially resilient, with nearly 80% reporting improved EBITDA margins and 30% maintaining a runway of six to twelve months, up from 20% last year.