The U.K.’s fintech sector was hit hard last year, with investment plunging 56% in 2022 to $17.4 billion from $39 billion the previous year, according to KPMG’s latest Pulse of Fintech report.

The second half of 2022 suffered more due to the combination of higher inflation and interest rates as well as volatile stock markets; this was across 593 private equity and venture capital fintech deals compared with 724 in 2021.

The first six months saw a total of $11.8 billion in fintech investments, with 365 deals, compared with just $5.6 billion in investments and 228 deals in the second half.

The slowdown also is reflected in the final global tally, where investments including mergers and acquisitions, private equity and venture capital skidded to $164 billion from $239 billion in the same time period. There were just more than 6,000 deals last year globally, compared with more than 7,300 in 2021.

Funding for the sector in 2022 was a tale of two halves, according to Karim Haji, head of financial services and a partner at accountancy firm KPMG.

“The variance highlights the shift in investor sentiment in the face of increasing geopolitical challenges leading to the lack of initial public offering exits, the downward pressure on valuations, and market turbulence,” Haji said.

Payments are the bright spot, with U.K. firms attracting $3.6 billion last year, the most in various fintech subsectors.

Despite the dramatic slowdown, the country is still ranked as one of the top three destinations for funding. “The U.K. is a major global player, with investment in U.K. fintech only behind that of the U.S. and Australia,” Haji said.

EMEA countries catching up to UK

However, certain countries in the EMEA region are catching up. For example, KPMG analysis shows that the value of French fintech deals rose 28% to $3.7 billion last year, while deals in Sweden, the home of Klarna, hit $3.7 billion, up from $2.6 billion.

The report was published amidst growing concerns over the future development of the U.K. fintech sector. Progress has been slow in implementing the proposals in the Kalifa report published two years ago. To date, recommendations such as sharpening skills, developing the industry nationally, increasing investment, and creating policy and regulation, have failed to materialize.

Market participants also point to recent government actions that seemingly run counter to the country’s ambition of remaining a global fintech leader. They cite the lack of visas to attract start-up talent and the removal of tax relief for research and development among key stumbling blocks.

Equally as important is the impending closure of Tech Nation, which was founded in 2010 and helped launch some of the biggest names the space, including Monzo, Revolut, Ocado, Skyscanner and Deliveroo.

The group, which relies on government funding, lost out on a recent round to Barclays Bank’s Eagle Labs unit, which delivers growth programs, business mentoring and events. Although there was a competitive tender, market participants are not happy to see such a well-established player leave the market.

The U.K. government, though, has assured the fintech sector it remains fully committed. In a recent statement about the U.K. fintech sector, Paul Scully, digital economy minister, said, “Despite global headwinds, British fintech firms showed great resilience last year and helped boost the U.K.’s status as a world leader in tech — delivering jobs and huge benefits for our economy.

“In 2023, we are focusing on maintaining that lead by supporting startups, boosting digital skills and making this country an even more attractive destination to found, grow and invest in tech businesses,” he said.