Funding to venture capital-backed financial technology companies dried up last quarter as cautious investors wait for various market storms to pass.
During the second quarter, VC-funded fintech dropped 49 percent to $2.5 billion from $4.9 billion in the prior quarter. Meanwhile, the number of deals closed fell 12 percent to 195 from 221 in the first quarter, according to a report from KPMG International and CB Insights on Wednesday. (Overall, fintech funding rose to $9.4 billion, a number driven in large part by a $4.5 billion round from Alibaba's Ant Financial, a private funding round not included in the VC numbers.)Geography Photos | UIG | Getty Images
A broad category, fintech uses technology to disrupt traditional financial activities and encompasses everything from lending tech, such as LendingClub's peer-to-peer lending platform, to personal finance technology, such as PersonalCapital.
The space faces uncertainty stemming from a number of factors: the Brexit vote, U.S. presidential election, lower confidence in marketplace lending following the turmoil at LendingClub and concern about valuation. Analysts noted "it was not surprising to see VC investors taking a pause, particularly from making significant fintech mega-deals."
They expect lower levels of funding to continue through the end of 2016 as investors wait to see how conditions shake out.
North America made up the largest share of deals with $1.3 billion funded across 97 deals, down from $1.8 billion across 130 deals in the prior quarter. The region's number of deals marked the lowest level in five quarters.
At the same time, corporate participation in fintech deals made up a larger share of the total as companies look to the sector to help them test new technology and respond to consumer demand for new ways to engage with their money. This group participated in nearly a third of deals in the second quarter, up from 24 percent in the prior quarter.
Many banks and financial institutions have shifted "from denial that change is required to a realization that change is necessary and a growing interest in learning how fintech can help better meet the needs of their customers," the report noted.
Among big banks, Goldman Sachs led the charge on investing in the industry, with 11 deals during the past five quarters, followed by 7 each at Citigroup and Banco Santander.
Moving forward, analysts expect fintech's outlook in North America to improve despite short-term headwinds driving uncertainty. This could come in the third quarter as investor sentiment about Brexit's impact improves or even in the fourth once the U.S. president election runs its course.