Anyone reading the financial and technology news in recent weeks could easily be led to assume there is a crisis happening in the technology space and that the only way from here is down.
With tech stocks taking a beating in recent months, and a growing list of scandals and debacles, from the sentencing of Theranos founder Elizabeth Holmes; the drama of the self-induced implosion of Twitter; unprecedented layoffs at tech giants like Meta, Amazon, Lyft, and Stripe; and now the collapse of the reputable face of cryptocurrency via the Ponzi scheme of FTX, many would be forgiven for thinking that this will lead to a crisis for the fintech space.
Reports of the death of fintech are greatly exaggerated, but the financial services industry as a whole needs to take note that the market is at a critical inflection point, with longer-term repercussions for innovation and fintech partnerships.
Levels of fintech investment are undoubtedly dropping in 2022, and this trend looks likely to continue into 2023. Early indications suggest fintech investment will end up 41% down from the highs of 2021. However, 2021 was an outlier of a year, fueled by a craze for crypto and the very high growth seen by many fintech startups as a result of the pandemic—further buoyed by a wave of acquisitions and IPOs across the fintech space.
The Drivers of Fintech Have Not Changed
This, in turn, provided a clear and profitable exit strategy for investors, helping to fuel overall market exuberance. Despite the cries of panic among some, the slowdown in fintech investment looks more like a return-to-earth market correction than a popping of a fintech bubble.
The fintech industry undoubtedly benefits from the fact that these companies tend to be revenue positive early on, with clear profitability models and scalable models for growth. While some subsectors, such as crypto, are undoubtedly in for a very bumpy ride, other areas such as payments, lending, cash management, customer experience, trade finance, and so on have seen significant growth in recent years.
There is little to indicate that the underlying market drivers of this growth (shifting customer expectations, regulatory drivers, new routes to market, embedded finance, etc.) will experience any significant shift in the near term. Even recent fintech unicorns like Stripe and Adyen look likely to survive long term even if their stock prices take a momentary dive.
Down With Visionaries, Up With Business Fundamentals
Undoubtedly, however, the broader technology and investment space is changing. At the root of much of this change is the fact that interest rates are rising, and money is not as cheap as it once was. As a result, investors throwing money at what some would call “tech visionaries” and others would call “idiot CEOs” is likely to wane for the foreseeable future.
Barefoot gurus focused on creative destruction and plans to grow users, but with no clear path to revenue, will face growing levels of questioning and lower levels of investment (hopefully). Expect to see a return to a focus on revenue models, efficiency, and good corporate governance across all technology sectors, including fintech.
With Mark Zuckerberg spending billions so far on the metaverse, with little to show for it and even less market interest (and much internet mockery), and Elon Musk seemingly turning into the Liz Truss of technology at surprising speed, blindly following the whims of autocratic technology leaders will no longer be acceptable to investors—or to potential banking partners.
Essentially, the fintech space is likely to see a tightening of belts and a closer look at first principles and business fundamentals. Ultimately, this will benefit the broader financial services space as it will help weed out weaker fintech startups without a solid grounding and help existing financial institutions (FIs) have greater assurance in the capabilities of their fintech partners.
The recent employee churn in technology also holds further opportunities for FIs and existing fintech vendors. Long-sought-after talent is suddenly becoming available on the market, which should provide good staffing opportunities (as long as FIs do not insist that employees sign decrees of being “hardcore”). Expect to see further acquisitions in the near term, albeit with less volatility than recent headlines have shown.
To learn more about how cryptocurrency is impacting the financial services industry, check out some of our latest cryptocurrency research or reach out to me at [email protected].
