Richard Wray, Chief Operations Officer at Carta Worldwide, writes for Payment Expert exploring the current status of the fintech sector and whether we are experiencing a downturn or a correction.
The fintech sector has been an astounding success over the past decade, with disruptors such as digital only banks like Monzo and Starling and investment apps like Robinhood raising trillions in investment at record breaking valuations. $1T since 2010 to be precise, according to a S&P Global Market Intelligence. Because fintech was born out of the 2008 recession, most fintechs haven’t had the unfortunate experience of going through a recession themselves. Now winter has finally come, and with it the first major test of their longevity has begun.
A Financial Times analysis found that shares in fintechs have fallen by more than 50 per cent since the start of the year, with a cumulative $156bn wiped off valuations in 2022. Global seed for growth stage funding is also on the decline dropping from $25bn in Q4 2021 to just $4.6bn in Q4 2022. Yet by historical standards funding is still high and 2022 is set to be the second-highest funding total for fintechs in the past five years according to Crunchbase.
The question is whether this is a downturn or simply a correction? Are fintech’s positioned well enough to survive? And if so, how will they do it? Here I explore the current environment for fintech and argue that there are new and latent opportunities for all players to win new customers, develop new solutions, and ride out the storm.
The long winter: How will the fintech industry survive?
All tech sectors are feeling the pinch, but it’s inevitable that the path is bumpier for fintechs. Not too long ago, fintechs took advantage of cheap money driven by low interest rates and VC-fuelled top-line customer growth. But the maths has now changed dramatically. High interest rates, a lack of cheap money, and falling consumer spending due to the cost-of-living crisis are dampening the market. This has resulted in falling valuations as costs are rising, revenues are reducing, resulting in layoffs, cost cutting, and retrenchment.
The days of acquiring customers and thinking about profitability later are over. Now it’s about survival of the fittest. Fintechs will need to slow down operational expenditure and re-evaluate if their products and services are sustainable. Are they too exposed to a single market? How can they increase volume with consumer spending already weakening and likely to continue its downward trajectory over the next several quarters? Can they continue to secure funding? These are some of the questions they need to be asking themselves.
Investment in the space will continue, albeit at a slower pace. Venture capital’s dry powder of deployable funds is at an all-time high but they are being more intentional about their underwriting for any new idea or concept.
What are the opportunities for fintechs?
The best fintechs have always demonstrated that they are able to deliver value in the face of adversity – the Covid-19 pandemic is an obvious example of this. But what are the emergent opportunities for fintechs ahead?
Responsible Spending
When the economy falters, consumers rein in spending and saving. It’s in times like these that products designed to help consumers better manage their finances and offer credit responsibility will flourish. Responsible spending apps will win consumer’s hearts. It isn’t surprising that this year HSBC added spend notifications to its banking app, a level of transparency that’s been available for years in neobank apps. If other providers don’t already offer these types of services, then they should be adding them in 2023 as it’s a quick win to encourage customer loyalty. Fintech have taken this even further by adding savings pots and rewards linked to savings.
In short, introducing features that help customers stay on top of their finances gives customers more reasons to keep using a provider’s financial offering.
Financial Inclusion
Fintechs can also help individuals access new earning opportunities and obtain the financial resources to pursue new ventures. Crowdfunding, peer-to-peer lending, DeFi are all excellent examples of funding systems for entrepreneurs that would otherwise be deprived of it, because they don’t meet the requirements of banks and other institutions.
Not to mention the millions of people around the world that are still left out of modern financial services. In regions like Latin America and Africa, fintech has been a powerful driver of financial inclusion. Globally fintechs were partly responsible for helping 1.2 billion people since 2011 open an account with a financial institution (WorldBank). That still leaves a huge opportunity to help another 1.7 billion of the underserved population access credit and commerce infrastructure. For instance, through immigrant focused cross-border cards which play a key role in bringing financial services to the unbanked individuals that have sadly been forced to flee war and persecution.
Carbon Tracking
Will consumers care less about climate projects when money is tight? The answer is unequivocally no. Only a few months ago, a UK poll showed that two thirds of consumers want the financial institutions they use to be more sustainable, with 67 percent believing their current bank or financial provider is guilty of greenwashing (Mambu, 2022).
Fintechs have an opportunity to play an impactful role in nurturing a new economic model and brighter future for all, but authenticity is important here. Institutions need to demonstrate that they are introducing sustainability features because it is important to them and their customers. Not because they simply want to attract more customers. Carbon tracking is a good start, but sustainability should be a life-long journey for every fintech.
Ride out and meet them
What this all means is that we are in a correction. Valuation and funding levels have cooled off but are still above pre-pandemic levels. Whether this correction becomes a downturn is dependent on how well fintechs pivot to address the emergent needs of consumers and businesses facing a recession and cost of living crisis.
During downturns, value takes on heightened importance and it will be the fintechs that find ways to help consumers better manage their finances, access new financial infrastructure, and spend more sustainably that will be left standing when the cloud finally clears
