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Venture investment in 2023 into financial services and fintech, which just a few years ago was the top sector for startup funding globally, totaled $43 billion, its lowest level in six years, according to data.

That鈥檚 down more than 50% year over year from the $89.5 billion invested in financial services in 2022, and even more dramatically from the $143 billion invested in the sector in the peak market of 2021.

While still a leading industry for startup investment, financial services has been knocked off the top perch. The AI and manufacturing sectors both outpaced fintech in terms of venture dollar investment in 2023 鈥斅燼 first in the last six years. Funding in 2023 to health care startups, including biotech companies, also topped financial services, as it has in prior years.

Late- and early-stage fintech funding decline

Late-stage funding to financial services and fintech startups in 2023 totaled only $25 billion, the lowest since 2017. Early-stage investment in fintech and financial services in 2023 was $12.4 billion 鈥斅爐he lowest since 2016.

While all funding stages to the sector were down, seed funding held up to pre-pandemic levels, falling below the past two years but still landing above the amounts invested in 2020 and prior years.

鈥業nterestingly priced deals鈥�

What does this all mean for fintech, one of the most significant technology sectors and one that experienced an investment boom in 2021 and into 2022?

鈥淵ou can find a lot more interestingly priced deals in a market like this in 2023, than you could find in 2021,鈥� said , a partner at who was previously at digital payments giant . 鈥淭here’s a valuation reset, which in the long run will actually be good for both the investing side and the company side because there’s no misincentives along the way.鈥�

Quarterly funding in this sector was below $10 billion per quarter, except for Q1 when raised $6.5 billion to cover employees stock option costs. That marked the largest funding in this sector in 2023, but came at a price: Stripe almost halved its $95 billion valuation from its 2021 funding.

鈥淭he worst of the fintech winter is behind us, and 2024 will look more like a pre-pandemic 2019,鈥� , managing partner at investment firm , said via email. 鈥淔intech deal volumes will finally stabilize before rising again 鈥� the first climb since 2022 Q1 鈥� and funding numbers will look like they did five years ago. The difference this time is that while 2021 saw a massive step function of digital adoption, 2024 will see the continued evolution of that change.鈥�

Investment focus

There are three areas of investment that Fiorentino is focused on in financial services that he said could be meaningful in 2024: The next generation of fintech infrastructure, finance tech for underserved industries, and the CFO software stack.

In fintech infrastructure, it became more apparent following the collapse of that there was a need for a more liquid marketplace for assets and deposits for the banking sector, according to Fiorentino.

The debt industry could benefit from new trading infrastructure products, just like built equity brokerage from the ground up, he said. 鈥淭he debt market in and of itself is still extremely archaic, but extremely large.鈥�

The 鈥渇orgotten industries鈥� that thus far haven鈥檛 been served well by fintech innovation but should be, according to Fiorentino, include supply chain logistics, insurance and manufacturing, to name a few. In many of these sectors, companies still use archaic billing systems and outdated, clunky legacy systems such as phone wire transfers, paper checks, and email and fax.

Another sector that could get more attention this year, according to Fiorentino, is software at the intersection where the CFO meets the CTO, to either increase revenue opportunities or manage a company’s spend.

That presents an opportunity for third-party tools to manage the shift from a flat SaaS model to usage-based billing, said Fiorentino. 鈥淐an I capture more upside if people really start to use my tool in a more dramatic fashion?鈥�

On the spend-management side, he said: 鈥淐an I control the end-to-end workflow of what people within my company are buying, how much we’re spending on it, and maximize the optimization of the pricing?鈥� The CTO needs visibility into tools the team is using and the CFO wants to save money.

Fiorentino noted, 鈥淚n a lot of these interesting companies, it’s not the payment itself that really differentiates the business. It’s actually the software workflow built around payments that differentiate it.鈥�

2023 exits and beyond

was the single fintech to go public at more than $1 billion in 2023. The company, which digitizes mortgages, went public via a SPAC merger in August at a value of $1.47 billion. As of Jan. 9, 2024, it was valued at $542 million.

Three fintech acquisitions above $1 billion in 2023 were , acquired by , low-cost wireless phone operator , which was acquired by , and Brazil-based infrastructure payments company , acquired by .

鈥淭he best later-stage companies that have been focusing on profitable growth for the past 12 months will start seriously considering IPOs once again,鈥� QED鈥檚 Morris predicted. 鈥淚 wouldn鈥檛 be surprised to see dozens of companies go public this year, including a number of fintechs, before the floodgates open properly by the middle of 2025.鈥�

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