A year in fintech: hope amid the gloom as innovation opens opportunities
A recurring theme at many fintech industry conferences over the last year has been the need for businesses to shift from growth to profitability. Against a backdrop of rising living costs and uncertainty driven by global events, funders have demanded a different kind of return on their investments in fintech startups. Throughout the different conferences we attended there was a palpable sense that life was getting that little bit tougher.
And tough it has been, with high profile corporate failures and workforce-shrinking restructures dominating the headlines. Yet here we are almost a year on, with 2024 now firmly on the horizon. Whisper it but the uncertainty seems to be lifting and a new landscape is coming into view.
This is being shaped by a combination of a new economic reality, advances in technology, and an insatiable appetite among innovators for success. Let’s look at some of the major factors that have changed the industry and areas of opportunity.
A new economic paradigm changes the game for fintech startups
First, a reality check.
Analysis of Fintech Control Tower and Capital IQ data by Boston Consulting Group showed that by the spring of 2022 valuations of fintechs across all segments and geographies had fallen by an average of more than 60%.
On top of this, CB Insights’ State of Fintech report revealed that by the second quarter of 2023 fintech funding had plummeted to its lowest level in six years. Quarter on quarter, deal volumes dropped by 22% to 845, in marked contrast to the wider venture deal ecosystem, which experienced a 16% decrease in activity.
Rising inflation and interest rates have played a big role in the squeeze – indeed financiers specialising in serving high net worth individuals have witnessed a leap in redemption rates and debt paydown. And in an already jittery climate, nerves weren’t helped when two major financial institutions in the form of Silicon Valley Bank and Credit Suisse collapsed in the spring.
This all happened in the wake of what some have described as the ‘crypto winter’, in which cryptocurrency values experienced a sustained decline as rising interest rates prompted investors to seek out returns elsewhere. Crypto exchange FTX’s failure in autumn 2022 added insult to a rather bad injury.
But while the last 12 months have been difficult with efficiency drives taking their toll on employees and cash flow, there have been pockets of hope.
Investors shift focus in a changing world
One area of optimism that needs no introduction is artificial intelligence, which has enjoyed a huge shift in funding globally.
This is particularly marked when it comes to AI in fintech, where the market grew from £7.4 billion in 2022 to £9.4 billion in 2023 and is forecast to achieve a CAGR of 26.8% up to 2027, reaching £25.7 billion.
Expect AI to continue to dominate innovation in the coming year, as capabilities improve at speed.
Another area that is experiencing growth is obviously embedded finance. That is, enabling non financial entities to offer financial services as part of their user journey. Amazon has led the way in providing consumers with seamless customer experiences at the point of checkout and others are keen to replicate its success in new segments. It’s no surprise that research by EY found embedded payments could reach £5.2 trillion by 2025.
The slow burn here is open banking.
With different approaches to implementation around the world, uptake rates are inconsistent. But in Europe, the regulatory approach is gathering strength thanks to the formulation of PSD3 and Payment Services Regulation, which aim to speed up adoption, harmonise payments and bolster consumer rights.
Currently, open banking market revenue globally is thought to be around £16.2 billion but this is forecast to grow to £129.3 billion by the early 2030s. The market is said to account for nearly half of the Banking-as-a-Service market and represents a significant opportunity to businesses looking to reduce the cost of transactions. For instance account-to-account payments offer an alternative to card transactions, which attract fees from different players in the ecosystem.
How can existing and new entrants take advantage of growth opportunities?
Still, there remains a need to focus on sustainable operations and profitability. But with innovation moving at pace, investing in technology is non-negotiable.
To thrive in the coming years, fintechs should look beyond the financial services sector and out to the wider economy for opportunities to add value and solve problems. At the same time, it’s imperative that financial institutions old and new collaborate to make it easier for non-financial entities to implement payment solutions.
This means both startup and incumbent fintechs will have to reconfigure marketing strategies to take account of audiences within their ecosystem and new verticals. And while challenges will persist, it’s clear that the overall fintech trajectory is positive. Because by 2030, the sector is expected to expand its current 2% share of global financial services revenue by some 1,100% to reach $1.5 trillion.
Perhaps things don’t look quite so uncertain after all.