Investments in Canadian fintech companies dropped last year, amid downward pressure on company valuations, according to a report released by KPMG LLP on Wednesday.

The report complied by PitchBook for KPMG’s Canadian division, found there were a total of 169 investments, worth US$1.3 billion in the fintech sector last year. This was down from a record 217 deals, worth US$7 billion, in 2021.

It also found that seed round and early-stage investments accounted for more than half of funding activity in 2022.

"It's not surprising to see a decline given the market rout, and the fact that fintech investments hit such feverish heights in 2021. But to put things into perspective: last year's activity was still stronger than 2020, and we also saw the second highest number of deals ever, so clearly investors were still finding many attractively priced opportunities," Geoff Rush, financial services industry leader at KPMG in Canada, said in the press release.

"The number of seed round and early-stage investments is also a positive sign for the strength of Canada's fintech ecosystem going forward.”

The most popular industry for investments were cryptocurrency-related companies (51), followed by payment companies (16 investments) and regulatory technology (15 investments).

But after a year of volatility in the digital asset space with the collapse of cryptocurrency exchange platform FTX Trading Ltd. and Luna coin crash, Rush said he expects to see a “slimmed-down, more transparent and accountable cryptoasset ecosystem emerge this year.”

Canada wasn’t the only country to see a decline in fintech investments last year.

In a report released by KPMG International on Monday, it found globally there were 6,006 deals in 2022, which were worth US$164 billion.

This was down from a record 7,321 deals, worth US$239 billion, in 2021.

YEAR AHEAD FOR FINTECH INVESTMENTS

The Canadian report said it expects the market slump will continue to put downward pressure on fintech valuations this year, as it did in 2022.

"A potential recession, rising interest rates and inflationary pressures are top of mind for investors, so we expect valuations and deal volumes to remain subdued through 2023, with a slight pickup near the end of the year," Georges Pigeon, partner in KPMG in Canada's Deal Advisory practice, said in the report.

Pigeon added that the “fintech space is also undergoing a bit of a mentality shift,” and after seeing a huge influx of capital in 2021, some firms won’t need more capital until “sometime in 2023 - maybe even 2024 – because they've streamlined and restructured their operations to make that cash last longer.”

“So instead of a 'growth at any cost' mentality, many fintechs are now focusing on sensible growth while preserving the cash they have on hand for as long as they can with an eye to achieving sustainable profitability in a not-too-distant future."