2023 is underway, and as is becoming the norm, uncertainty is the dominant theme. One question is whether this year could be even more unstable than 2022? From the economic slowdown and even recession in most of the world, the socio-political impact of inflation and its unexpected consequences, to the ongoing war in Ukraine, the outlook appears bleak. The only positive news is that political leaders across the globe are starting to behave like technocrats not autocrats. In countries as diverse as Brazil, Italy and China, much of the fiery rhetoric of the past few years is being toned down.
What will the effect of this uncertainty be on banking and fintech?
In the fintech world, startups are struggling with the challenges of finding investment following the incredible inflation in the size of funding rounds and valuations of recent years.
By contrast, legacy banks are much better placed, cushioned by rising interest rates and the opportunity to win back customers. What’s more, an uncertain economic outlook often makes consumers and businesses risk-averse and less inclined to do business with fintechs and challenger banks. This decrease in customer engagement with their rivals and lower VC interest will put the incumbent financial institutions in a stronger position than they were a few months ago.
But while the fintechs may have been overvalued, their offering is almost always superior in terms of customer centricity, user experience and even proposition to those of many incumbent banks which tend to limit themselves to digitising their existing legacy offers.
It’s also far from game over for the much-maligned cryptocurrencies and exchanges. On the contrary, the recent FTX and Genesis scandals have resulted in a market crash and a huge increase in demand for greater regulation – a factor that will eventually result in the normalisation and legitimisation of the sector.
Here are my predictions on the trends shaping fintech and banking this year:
1. Fantasy Valuations in Fintech Fall Away
According to CB Insights, global fintech investment reached just $75.2 billion in 2022 — down 46% from 2021 (but up 52% compared to 2020). 2023 is likely to continue this trend.
We have seen some amazing down-rounds in recent months – beyond the fall in Klarna’s valuation. Boston-based cybersecurity Snyk latest raise valued it at a $7.4 billion valuation, a 13% drop from September 2021 when it was valued at $8.5 billion. New York-based Dataiku recently raised a $3.7 billion valuation, down from $4.6 billion valuation in August 2021. And in London, Checkout.com reportedly cut its internal valuation to approximately $11 billion, down from $40 billion in January 2022,
Fintechs will be hoping that this new era of shareholder caution is short-lived. Some reports suggest 44% of fintechs with less than US$10m risk running out of funds in the next 12 months.
As these new austere market conditions take hold, fintechs face a battle for survival. Strategies which embrace lean business models and well-mapped, sustainable routes to profitability will separate the survivors from the rest.
2. Fintechs: The Leaders of the Future?
Not all hope is lost for fintechs. One consequence of the global downturn is that the number of fintechs will reduce, but those that pull through will be much stronger businesses with sound and sustainable business plans. What’s more, these surviving firms will usher in a new fintech era where fewer but stronger and more profitable businesses will provide a serious challenge to incumbent banks.
This fresh emphasis on the importance of sustainable profitability in fintech is likely to impact some corporate startups. The demise of Marcus, Goldman Sachs’ retail banking venture, took many industry experts by surprise. When asked about it, the bank’s CEO, David Solomon, said, ‘We tried to do too much, too quickly’. Will we see more corporate digital challengers disappearing in 2023? Probably.
3. Banks Go On the Acquisition Trail
CVCs, financial institutions and big tech with deep pockets could take advantage of the fall in fintech valuations. If they do, this could kick off a trend that should gain traction this year – incumbent banks buying promising fintechs so that they can’t compete and also to supercharge the banks’ own digital journeys. Corporate M&A and CVC deals are likely to take off in 2023. As Gary Dushnitsky, Associate Professor. Strategy and Entrepreneurship at London Business School put it: “The number and value of CVC deals will rise ahead of those seen in VC generally. Corporate venture may be the key driver of which sectors emerge over the coming year. And this will influence VC trends, rather than the other way round.”
CVC and corporates will not only have a chance to invest much more cheaply, but they could also play a starring role in the emergence of the bank of the future (AKA “the Spotify of banking”).
4. Crypto Recovers Credibility
Despite the scandals of 2023, the technology behind crypto and DeFi can’t be uninvented – in fact, crypto is arguably now mainstream. Banks and regulators alike have realised there’s a lot of money to be made – and lost – in crypto.
Regulation will accelerate, and countries will rush to launch the first CBDCs, a race which the Eurozone will win. As a result, consumer confidence in crypto will slowly start to return. The fact that Bitcoin is recovering its value post the collapse of FTX is just a sign of things to come.
2023 will be a year of change and transformation. Change is good, but it won’t be painless for everyone.
About the Author
Alessandro Hatami founder of strategic consultancy Pacemakers.