Legacy banks, for example, may weather the storm fairly comfortably, buoyed by rising interest rates and an opportunity to acquire from their younger, savvier fintech cousins. And crypto – on the down – is far from out. While digital currencies are hardly immune from a worldwide recession, recent scandals have provided a turning point for greater regulation and a possible legitimisation.
Here’s my take on the shifts that’ll take place in banking this year in what is arguably the toughest environment yet.
Farewell, fintech fairytales
With corporate-backed fintech investments plunging 92% in value in 2022 Q3, amid widespread layoffs, 2023 will continue to see a slowdown to fintech’s once-meteoric ascent. The longer the current mood of venture capitalist caution prevails, the greater the damage will be. SVB’s latest State of Fintech Report predicts that, with VC-backed valuations declining at all stages, 30% of fintech companies with more than US$50m in revenue have less than a year’s worth of leeway left – rising to nearly half (44%) of fintechs with less than US$10m to their name.
As intense bidding stalls, new more cautious market conditions will determine which fintechs stay in the game. Some of the fintechs that thrived on abundant equity to finance their growth may find it difficult to continue to trade, while some will be able to survive, possibly securing further investment by adopting more frugal business models. The digital transformation of banking, finance and payments will not slow down as benefits are clear to all – but innovators seeking investment will need to provide a much clearer narrative on their chosen path to sustainable growth and profitability. Realism will finally grace the world of fintech investment.
Boom time for incumbent banks
Having been on the backfoot for so long, legacy players will have their moment in the sun this year. A hat-trick of higher interest rates, less fintech competition and a likely increase in regulatory scrutiny will possibly mean that many incumbents will find this year less challenging.
This is especially true as the transition to digital continues with banks announcing further branch closures and staff layoffs reducing front-end costs. This year will provide a real opportunity for incumbent banks and financial services providers to consolidate their position with customers expecting their banking provider to offer both innovative solutions and financial stability.
One trend that is likely to materialise in 2023 is that of the incumbent banks acquiring innovative fintechs to both accelerate their digital transformation and reduce competition. This year could prove to be a golden year for corporate M&A and CVC.
Valuations becoming more real
Fintechs are far from a write-off, however. At the tail end of 2022 we saw leading brands such as Klarna and Checkout.com decide to access capital via less generous deal terms than in the past. We will certainly see more “down rounds” in 2023. As we said above, these less generous valuations will inevitably result in some firms not being able to secure a survival path past the difficult months ahead.
But some firms will survive and will be stronger for it. One of the outcomes of the tough economic climate is that we will see fewer fintechs, but those that survive will be much more solid. Just as the dot-com crash of 2000 led to the creation of the likes of Amazon and Expedia, it is likely that 2023 will lead to the emergence of fewer but more solid global fintech players that will be much more resilient and effective than the current players.
Organisations with access to capital will be able to be part of the success story of these fintech survivors. Beyond the CVCs mentioned above, Big Tech should also see the opportunity to invest in the best fintechs at an irresistible discount. These investments could provide Big Tech with the opportunity of expanding their offering to their existing users with something they have struggled to deliver in the past – financial services their customers actually need.
Crypto’s comeback moment?
One big question at the end of 2022 was whether crypto markets would survive in 2023. The recent turmoil, in other words, is the end of the beginning – but far from the beginning of the end. The meltdown of FTX and other related scandals has resulted in a much deeper soul searching on the nature of cryptocurrencies and distributed ledger technology.
Two trends seem to be emerging: existing financial services players acknowledge that crypto is not a fad that will disappear and, secondly, governments and regulators are realising that they need to set some rules and guidelines if they want to avoid even bigger mishaps in the future.
This does not mean that we will see an immediate recovery of cryptocurrencies in 2023 but will see them becoming more “normal” and acceptable by the wider financial establishment. Having awakened banks and regulators to crypto’s potential, we’ll now see an onslaught of regulatory and compliance solutions – with major markets racing to launch the first Central Bank Digital Currencies (a contest the Eurozone is well positioned to lead). With investor protection in place, consumer confidence will return, prompting the next stage of the crypto evolution.