Unlocking global fintech potential: bridging the venture capital funding divide

Over the past decade, fintech has transformed the way consumers and businesses use financial services. Venture capital (VC) plays a key role in enabling fintech innovation and has been an important driver of the industry’s development.

However, obtaining VC funding remains a challenge for many fintech companies across regions. A disparity exists between where VC investments are directed and where funding is most needed, which undoubtedly impedes the progress of fintech innovation.

To confront this pressing challenge, the World Economic Forum and McKinsey & Company (McKinsey) have jointly launched an initiative entitled Fuelling Innovation: Closing Fintech Funding Gaps and a white paper of the same name based on primary research, quantitative analysis, stakeholder interviews and thematic workshops with the initiative’s steering committee and working group members.

Venture capital has long played a crucial role in financing waves of technological innovation. Over the past nine years, fintech has consistently ranked as one of the top sectors in terms of VC investment, attracting a 12% share of all VC funding on average.

Global VC funding for fintechs grew steadily, from $18 billion in 2015 to $92 billion in 2021, driven by the low-interest rate environment as well as pandemic-induced digitalization.

However, this explosive growth quickly reversed as geopolitical instability and rising interest rates dampened valuations, leading to a decline to $30 billion in 2023 – marking a 67% decrease from the 2021 peak.

Exceptional fintech growth in some regions is bucking the decline in global VC fintech funding and highlights the potential of these markets to attract investment and foster a thriving fintech ecosystem.

Latin America and the Caribbean (LAC) has notably seen the highest compound annual funding growth, at an annual average of 37% between 2015 and 2023, despite an 81% decrease since the 2021 peak.

The Middle East and North Africa (MENA) had the second-highest growth rate for fintech VC funding between 2015 and 2023, with an annual average growth of 33%. The volume of funding in the region tripled between 2020 and 2023 and MENA was the only region to see funding growth between 2021 to 2023.

Despite this downturn, the fundamental drivers of fintech adoption remain strong, with the industry's growth rate expected to outpace retail banking between 2022 and 2028.

The fintech industry has become the second most prolific creator of unicorns – start-ups that exceed a $1 billion valuation – just behind enterprise software. As of 2023, approximately 362 fintechs globally have reached unicorn valuation, and nearly 150 fintech unicorns have realized an exit.

As the global economy recovers and investor confidence returns, the fintech industry is well-positioned to attract renewed interest, fuelling the next wave of innovation and growth.

The fintech funding landscape is marked by significant geographic disparities. Sub-Saharan Africa (SSA), LAC and MENA collectively received only 10% of global fintech funding during 2020-23, yet are projected to generate 15% of global fintech revenue by 2028.

Exceptional fintech growth in some regions, particularly LAC and MENA, resists the global trend, highlighting the potential of these markets to attract investment and foster a thriving fintech ecosystem.

The balance between local and foreign investment varies dramatically from one part of the world to another, painting a diverse picture of global fintech funding.

Both local and foreign VC investors play a crucial role in nurturing fintech ecosystems and helping fintechs scale. Local investors can bring intimate knowledge of the domestic market, allowing them to support homegrown fintech start-ups that address specific local needs and challenges.

Meanwhile, foreign investors can contribute by providing a global perspective, extensive networks, and often access to larger pools of capital. Ultimately, the collaboration between local and foreign investors is essential.

Fintech funding in the US and Canada has the highest concentration of local investors above 85% as of 2023, followed by Europe with 53.2% of local investors. Across Asia Pacific (APAC), LAC, MENA and SSA, the investment landscape looks dramatically different, with an average of 36% of investments made by local investors and 64% made by foreign investors.

However, the share of local investors has notably increased since 2015. The most impressive growth can be witnessed in MENA, where the share of local investors has grown from 10% in 2015 to 47.5% in 2023. Similarly, in LAC, the percentage of local investors has grown from 24.7% in 2015 to 34.7% in 2023.

To close fintech funding gaps and foster a more robust fintech ecosystem, our report identifies five strategic pathways. These recommendations emerged from consultations with key industry stakeholders, including fintech founders and venture capital investors.

These include investing in digital public infrastructure, enhancing regulatory clarity and encouraging regional collaboration, nurturing talent and strengthening support networks, developing local financing capacity, and encouraging sustainable fintech growth strategies.

Collectively, we believe these pathways provide a comprehensive approach to developing a supportive fintech environment and creating attractive fintech investment opportunities.

The fintech industry’s expansion over the last 10 years has been a powerful catalyst for innovation, inclusion, and growth in the financial services sector and the wider economy.

As we look to the future, we can continue this trajectory could be continued by enhancing collaboration across stakeholders to develop an enabling environment that attracts venture capital fintech funding where it is needed most.

Through healthy funding opportunities, we can harness the power of fintech to create value for businesses and individuals alike and contribute to a more accessible, innovative and resilient global financial ecosystem.

This white paper published in collaboration with McKinsey and Company, is part of the World Economic Forum's Future of Venture Capital initiative. The Future of Global Venture Capital initiative brings together industry leaders to identify collaborative opportunities to strengthen the global venture capital ecosystem.