In 2022, DataSeers tracked two significant events: the shrinkage of funding and related losses in the venture capital investment world and the significant turmoil in the crypto world, most recently capped off by the FTX collapse.
From FTX, BlockFi, and Voyager to Celsius, it has been a tough year out there for cryptocurrencies. On the funding side, research has given us a clear indication of what has transpired. While one-fifth of all venture capital investments went to fintech in 2021, support fell significantly this year. By the end of Q1, VC funding had dropped by 20 percent. By Q3, VC fintech investment totaled just $12.9 billion, down $23.1 billion year over year.
It’s clear the fintech bubble is bursting, reshaping the battle between traditional financial institutions and their tech-oriented counterparts. Fintech companies have too often failed to execute their stated goals and priorities, including becoming operationally profitable or adequately capitalized.
As a result, fintech companies are finding ways to preserve their cash and lengthen their runways like dramatically cutting staff and overhead costs. Meanwhile, product adoption remains slow, with many service categories reporting low single-digit worldwide market share.
What lessons have you learned from 2022?
For one, 2022 taught me that fintech companies need to be VERY careful about raising money. I cannot deny that I had a moment of FOMO and wondered whether I should consider raising money too. Thankfully, after much consideration and research, I made an educated decision for my growing fintech and did not. Many of these companies that previously had billions in valuations cannot raise any money now in the changed market, but they still have to live up to their high valuations. When the market goes down, valuations go right down with it. Right now, it’s better for fintech companies to make careful and sound decisions, instead of seeking more funding while laying off personnel.
Predictions for 2023
DataSeers predicts three trends for the coming year:
- Fighting fraud will remain a top priority
- Credit will become more critical
- The economy will shrink
1. Fighting fraud will remain a top priority
In 2022, fraud continued to plague fintech startups. While fraud detection and prevention technologies continue to improve, bad actors are also evolving their tactics. This pressure requires fintech startups to enhance and mature their fraud prevention capacity.
2. Credit will become more critical
As the economy worsens in 2023, inflation, more layoffs, and other factors will force consumers to turn to credit cards and loans to subsidize diminished buying power. Accordingly, fintech services will see a significant uptick in credit-related services and need to pivot resources to support shifting consumer demand.
3. The economy will shrink
Rising interest rates make borrowing more expensive for individuals and companies, ultimately diminishing spending in a reciprocal cycle that collectively erodes economic growth. As spending decreases, fintechs will need to pivot toward fees, a difficult challenge when fees are broadly scrutinized. In other words, fintechs will need to find creative ways to boost profitability as their investors pressure them to generate returns on their investments. This challenge will be exacerbated by new regulations, like the expansion of Regulation II which impacts debit card interchange fees and routing, which now applies to all transactions.
How can we move fintech forward in 2023?
With broad economic trends like rising inflation, extensive market declines, and accelerating layoffs, it is clear that change is happening and will continue to accelerate in the year ahead.
Industry stakeholders should expect further regulation to shape the financial landscape, especially as it relates to cryptocurrencies and other novel financial products and services. With a presidential election on the horizon, leaders should also monitor the policy implications and their impact on their operations.
Staying ahead of the current trends with innovative solutions can help companies support their customers and enhance business outcomes, even in uncertain or difficult times.
The good news is that fintech is resilient as an industry! It will find new ways to go forward. I also think that it’s the year when banks will be fighting back. Fighting back means that banks will start employing technology (or partnering with fintechs that provide it) so they can remain relevant and innovative to effectively compete with the fintechs.
After back-to-back pandemic years, leaders were hoping for a return to normal. The year ahead promises to be turbulent, but it also presents opportunities for companies to further refine their efforts, ensuring they are ready to meet the challenges of today with an eye on the opportunities of tomorrow.