While crypto’s chaos may have stolen the limelight for the better half of the year, fintech has also had a rocky 2022.
Hit by the global macroeconomic climate, valuations have been falling, and the latter half of the year has been tainted by endless stories of tech layoffs.
Startups and unicorns face difficult times, with the poster children of yesteryear falling to their knees.
Klarna, despite remaining optimistic about profits for the year ahead, is looking down the barrel of losses, while the likes of Brex, Stripe, and Plaid cut significant portions of their staff.
Despite all this, Revolut and Starling Banks have continued to grow, waltzing through the news cycles with lofty announcements of new products and profits.
Drops in valuations and hikes in rates and inflation have caused funding to dry up — turning into the enigmatic “dry powder” at record highs.
Many are unsure what to make of it, and some see the build-up as a source of hope and potential, although a bitter pill for the millions of floundering startups drowning under increasing economic challenges.
As if trust levels weren’t already low enough, additional headwinds have been added by a campaign to demonize the fintech sector for “causing” significant levels of PPP fraud in the U.S.
Although it may seem like a hellish year for fintech, it’s not all been doom and gloom. Significant headway has been made in developing underlying technology and the regulatory landscape for some areas. Experts see banking and B2B products among sectors that show strength despite the ongoing storm.
Among the gangue of fear, uncertainty, and doubt, leaders are identifying nuggets of hope for the year ahead.
Connected payments are a big leap forward
Andrew Jamison, Extend‘s CEO & Co-Founder, said banks would offer more help to SMB management solutions, and neobanks would partner with fintechs or buy them outright.
“Now, traditional banks are poised to roll out in-demand digital spend management solutions, just as startup challengers are feeling the pinch of tighter funding and more constrained 2023 budgets. The result will be stronger relationships between small and mid-market businesses and the well-established banks they know and trust.”
Virtual card usage will accelerate. Businesses have embraced virtual cards to pay vendors, track and bill back expenses, gain visibility into spending, and more. But there hasn’t been ubiquitous acceptance of Apple Pay and Google Pay at brick-and-mortar checkouts, nor have all banks and card networks enabled virtual cards to be added to these services.
“Industry analysts say this “last mile” challenge won’t last. They predict the global number of virtual card transactions through mobile payment methods will grow from 5 billion in 2022 to 53 billion by 2027. We’ll see a big leap forward in this area in 2023.”
Embedded payments will enter its “2.0” era as businesses connect vital assets: their core software platforms and their credit card issuers of choice. Embedded financial services accounted for $2.6 trillion of US financial transactions in 2021; by 2026, that number is expected to exceed $7 trillion.
“A growing web of connections across card issuers, processors, and networks will evolve into a de facto standard. With ‘connected payments’ on the horizon, we’ll see software providers offering payment solutions over the top of card payment rails, banks strengthening relationships with their business clients, and users reaping the benefits of additional payment functionality without the friction of change management.”
VC will come back, said Arc Technologies.
Don Muir, CEO and Founder of Arc Technologies, said the market tune would change after the fed lets up.
“My bet is effective federal fund rates will top out at around 5% in q1 of 2023, and then I’m expecting rate cuts by Q3 Q4 of 2023. We’ll see venture capital investment returning to the market by late 2023.”
“I think we’re in for some challenging times for startups, particularly those with low runway. But if you can weather the storm for the next 12 months, I think there’s a light at the end of the tunnel in late 2023 or early 2024. And I expect the VC to come back in force and deploy all that dry powder sitting on the sidelines.”
“I’m incredibly bullish on the tech ecosystem of founders. I’ve, I’ve met with 1000s of software founders over the last two years, and the level of resiliency, the scrappiness, the Hustle that I’ve seen in good times and in bad gives me the conviction that the market will come back with a vengeance by the second half of next year.”
The year of B2B BNPL
Jifiti CEO and Co-Founder Yaacov Martin said the B2B BNPL space would blow up.
“Within the B2B BNPL space, there are two buckets, and we expect both to develop almost separately in 2023. One is where businesses need BNPL when buying office furniture, and the second is where businesses need working capital.”
“These two use cases are very different from one another. Individuals buying for businesses are also consumers in their capacity and are demanding the same easy access to financing for their business purchases.”
“We expect to see both of these buckets or segments grow. Specifically, we expect greater and more seamless access to small and medium businesses seeking working capital, especially when underwriters can access their historical transactional data.”
Digital Banking on the rise
LendingClub’s Financial Health Officer, Anuj Nayar, said that the tailwinds of a bad market are slowing down and will separate the weak from the chaff.
“Current market conditions are acting as a force to separate the strong performers from those struggling as we head into 2023. It seems to me that fintechs who are successfully navigating this wavering economy are those in digital banking space, especially those with a bank charter, the lack of which appears to be adversely impacting resiliency.”
“We’ve seen that by offering a range of services, fintechs are setting themselves up for success with an assortment of tools to weed through today’s macroeconomic landscape and better support the next generation of banking customers.”
“These services include traditional banking offerings such as Checking and High Yield Savings accounts, as well as tech-enabled solutions and new ways to provide corporate card and expense management. Often overlooked is that a robust and customer-oriented collections capability for debt is a prerequisite for success in a downturn.”
“Fintech M&A increased in 2022 with TD Bank/First Horizon deals. As the cost of funds increases, this trend could accelerate dramatically. Well-capitalized buyers are still looking to accelerate out of a potential downturn through acquisitions and consolidations.”
“CFPB recently proposed a new rule under Section 1033 of the Dodd-Frank Act on open banking and consumer data rights. The proposed rule will empower consumers to “break up” with banks that provide bad service by providing consumers greater access to their financial records. This rule could create a huge opportunity for fintechs and banks by removing some of the current friction in the market.”
“It could help end the trend of consumers paying too much for credit and earning too little from their bank accounts. It could also help consumers switch to fintechs and banks that offer lower rates on loans and pay higher interest rates.”
VC investing in fintechs that help SMBs
Tosin Eniolorunda, TeamApt CEO and co-founder, said VC slowdowns and the disappearance of external funding had pushed fintechs to cut costs, which will continue into the new year.
“Compared to the “growth at all costs” mindset that characterized 2021 and even the first few months of 2022, profitability and unit economics are now top of the priority list for investors across the world. We expect to see this “do more with less” attitude continue well into 2023.”
“On a more positive note, we’ve continued to see great strides in digitizing SMBs, particularly in emerging markets where these enterprises are the lifeblood of the economy. VC money has tended to follow across the SMB digitization value chain, from payments to business management tools.”
“I think in the next 12 months, VC activity will start increasing. The only thing that will sustain will be around longer timelines for investing, as VCs will be keen on doing deep due diligence. Valuations will continue to be pegged to a company’s fundamentals, such as its unit economics. There will be a focus on high-quality transactions where the business models are proven.”
“We expect the tailwinds around cashless transactions will continue to drive the adoption and penetration of fintechs which fill a gap or solve pain points for customers in these areas. In addition, regulators will be keener to take on newer innovations – particularly those closely related to crypto, given the recent turmoil in the ecosystem.
“Consolidation will start in the fintech space in collaboration with banks and larger fintechs forming strategic partnerships with smaller ones. Fintechs must focus on customer experience to ensure they continue to protect their customers from fraudulent activities in the months and years ahead.”
Embedded banking from Marqeta
Randy Kern, CTO of Marqeta, said 2023 would be the year of embedded banking.
“I expect 2023 will be the year that traditional banking services finally begin meeting the consumer where they spend more of their time, embedded within existing brand experiences. A younger segment of the population may have very limited interactions with physical cards and bank branches, instead doing most of their banking on the phone.
“With recent embedded finance solutions that have been stress-tested and achieved critical mass, everyday banking looks to be increasingly integrated into non-banking brands. Whether it’s peer-to-peer, B2B, lending, or servicing, I expect we’ll see banking finally catch up with the consumer wherever they are and focus on providing a seamless experience.”
Embedded finance will help B2B pain points
Seth McGuire, CRO of Galileo Financial Technologies, said embedded finance would help solve B2B pain points.
“Embedded finance, an industry estimated to grow to $7.2 trillion by 2030, has seen rapid adoption. While consumers first experienced growth by embracing digital payments, businesses are racing to add financial technology to their go-to-market strategy.”
“Embedded finance presents immense opportunities for business leaders looking to solve real B2B payment pain points while creating new, sustainable revenue streams. Part of that opportunity is due to embedded systems’ faster, easier, recurring nature. Still, part of it is the additional data and valuable insights that can be captured and leveraged through these customer interactions.”
Payment evolutions will help B2B
Brandon Spear, CEO at TreviPay, said payments would help suppliers access more customers and platforms.
“The future of B2B payments is an easier pathway for all suppliers to have access to platforms and capabilities that allow them to expand the types of customers they want to serve across multiple locations. The key will be recognizing that companies do not have to solve all these problems independently.”
“There tends to be an inherent desire to own an entire customer ecosystem or platform, but this is less likely to be successful for B2B transactions given the complexity and cross-border nuances. Merchants must put their business buyers’ needs at the center and understand who they can collaborate with to solve the problem.”
“Partnering with a purpose-built B2B invoicing and payments provider will likely be the fastest way for an easy, plug-and-play experience for corporate customers.”
Tools and AI will help SMEs
Chirag Shah, CEO, and Founder of Nucleus Commercial Finance, said simpler-to-use tools and AI would help business owners.
“While investment and running costs are still likely to be an area of concern for business owners next year, a lot is anticipated for 2023. Via further innovation and investment in fintech, we should see the delivery of simpler-to-use tools that will showcase the actual benefits of AI. These should include simplified accounting systems, forecasting tools, competitor benchmarking, and debtor and creditor management.
“Along with this innovation, throughout the first half of next year, SME business owners will also start to feel the first impact of the metaverse.
“This will enable fintechs to create a more personalized and immersive experience, bringing an emotional connection to the customer’s digital journeys, offer a bank branch and more personal environment, help enhance the “in-person experience” with customer relationship teams and further inform investment advisors when speaking with clients.”
ID verification will help dry up fraud
Tommy Nicholas, Co-founder and CEO of Alloy, said fraud would only leave when regulators and banks figure it out.
“Current macroeconomic headwinds will present new challenges for the financial services industry, but the looming consumer debt crisis is overblown. The real problem is fraud. Some say fraud increases during economic downturns, but fraud has had the biggest increase over the last two years, despite a strong macro environment. Fraud will keep increasing, and businesses will be forced to address it.”
“Regulators will require banks to do more to combat P2P payment fraud on their platforms. Political actors like Elizabeth Warren will lobby to apply Regulation E to P2P transactions on banking platforms – meaning that banks will be on the hook to reimburse customers for any losses incurred from fraudulent transfers. If banks can figure out how to combat this fraud on their own, the discussion may die down, but if not, regulators will force their hand.”
“Fintech companies that lacked sustainable unit economics from the beginning will not survive next year. For example, businesses that offer checking accounts that aren’t providing revenue will no longer be sustainable as venture funding dries up.”
“Those businesses often lack overdraft fees or recourse, which may work for good consumers but is bad for fraudsters who will rack up withdrawals without any intent to deposit money into their account.”
VC will come back
Bernhard Blaha, CEO of The People’s SCE, said VC would come back, and blockchain would have to remake its name.
“This year has been a very interesting ‘stress test’ for the fintech industry overall. There has been a long-held opinion that fintech is evergreen and is not affected by recessions or global economic slowdowns, however when fintech companies are structured traditionally — that being with a series of owners and the need to raise capital to grow, many have stagnated.
“This is because access to capital has decreased across all industry sectors. Mega-round funding for 2022 came in at $4.4B, the lowest level recorded since 2018, according to the latest CBInsights report. Equally, fintech unicorn births fell below double digits for the first time since 2020, with just six new unicorns in Q3 2022.
“This means that companies looking to dominate in fintech may have a good idea, but their commercial structure can hold them back. The past months have shown significant flaws where blockchain technology meets centralized custody. I see this as a highlight as it, more than ever, shows the importance of taking control of wealth away from a few controlling entities and giving it back to the people, a development we have seen over the past years that I expect to continue.”
CBDCs will be big
Richard Turrin, Author of “Cashless” and fintech, AI, and Innovation Consultant, said CBDCs are the soon-to-arrive future.
“With around 95% of the world’s central banks investigating CBDCs, it’s clear that we all have a shared CBDC future. While only about four CBDCs have launched now, recent OMFIF statistics show that we will have 24 within the next two years and likely 36 within five.”
“China’s CBDC is the most ambitious, and I predict it will launch in 2023, making it the first one launched by an economically critical nation. The European Central Bank is not that far behind, and we may see a digital euro by 2027. We are facing a future where CBDCs will eventually be used for domestic and international payments.”
“The international use of CBDCs is causing global geopolitical concern as CBDCs do not use the traditional SWIFT transfer network, which supports U.S. and EU sanctions. The BRICS nations will all have CBDCs within the next two years, and it is reasonable to assume that they will start “de-dollarizing” some of their trade using CBDC.”
“I like to say that the digital RMB or other CBDCs don’t have to topple the dollar to be effective; all they need to do is provide an alternative. The best example of this is to look at fintech markets where fintechs haven’t toppled incumbent banks, but their lower prices or better service has caused incumbents to change their ways.”
“China’s digital yuan and the CBDCs issued by BRICS nations will do the same for currency markets. Providing an alternative to traditional dollar transfers will force incumbents to become more competitive and drive costs down for everyone.”
Dr. Jonas Gross, Chairman of the Digital Euro Association, agreed and said three CBDCs could be launched globally.
Digital Euro: The ECB will conclude its investigation phase into the digital euro in September 2023. Then, it will be decided if the project will continue to the development phase and if a digital euro will be issued. I expect that the decision will be to launch a digital euro. However, this will require substantial time. I think an introduction in 2026/2027 is realistic.
Digital Yuan: The digital yuan is a step-by-step rollout in China. Testing and step-wide rolling out have taken place for more than two years. It would not surprise me if the digital yuan were introduced in 2023 country-wide.
CBDCs worldwide: I expect more countries to start exploring CBDC and that many countries already exploring it will continue into the developing phase. Further, I would guess that up to three CBDCs will be launched globally.
Unit economics
Trevor Marshall, CTO of Current, said the new year would see unit economics, profit, and excellent partnerships lead to survival. He said their firm’s recent partnerships with Visa and Zero Hash would let them go far, and the firm plans to launch its credit card in the new year.
“Credit is a significant area of focus for us into next year. A lot of it is because people are starting to face some financial hardships when it comes to the price of eggs when it comes to gallon milk, the real goods that they have to spend on, and we’ll be sort of entering the market with a few different credit options and features.”
“Our customers ask for a big focus, like growing your credit score, which is just short. It’s not necessarily a means to an end. We want to be able to provide liquidity between paychecks. We think we can help ease quite a lot of financial stress. We already do that with our No Fee overdraft program, which helps tie our customers between paychecks. And so, thinking about how that expands in the credit contracts.”
“We’ve shown that every change you can make, for example, every percentage change of monthly retention, is highly transformative to those unit economics. We think a lot about what features we can add, just investments in your platform. Whether it’s increasing trust by a quick-to-understand transaction history and balance or other insights to help manage spending. These are all things that our customers come to expect from us, and pushing you into those features more next year is a big part of our roadmap.”
He said adding crypto trading through zero hash helped with retention, and moving all transactions under a Visa partnership made unit economics excel. Unfortunately, he said many users would see recessionary forces push their spending habits. Marshall said the first option would likely be a credit building secured credit card, moving on to others later to boost retention rates and the customer lifespan.
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