Regulatory challenges more prominent in eyes of fintech industry leaders this year

Regulatory challenges have doubled in importance to fintech leaders from 2021 to 2022, according to the results of a survey of 100 industry leaders released Monday.

Nearly one-third (32%) of fintech company leaders saw regulatory challenges as the main threat to their businesses in the first quarter of this year, compared to 16% in 2021, according to the Fintech in 2022 survey by Alloy and Gartner Peer Insights.

Now, nearly half (47%) of respondents dubbed regulatory challenges their No. 1 concern.

It’s easy for industry leaders to see the writing on the wall: survey data was collected Aug. 2 to Oct, 22, after several U.S. senators first put big-bank-owned fintech Zelle under a microscope due to fraud concerns. Shortly before the report came out, the Treasury Department declared a need for more oversight of the fintech sector and bank-fintech partnerships.

Explaining the swift growth in fintech leaders’ priority of regulatory challenges, Alloy General Manager Charley Ma said that, before this year, “regulators were sort of viewed as they move really slowly, and they’re more interested in regulating large banks and [financial institutions].” Regulators, he said, “have moved a lot faster this year, for example, with crypto, and anything within crypto will touch fintech.”

Noting the “spectacular failures in the stablecoin space, like Luna and Terra,” fintech and crypto both have a “big, flashing red light for regulators to look at,” Ma said.

Although 28% of respondents mentioned crypto as “the most exciting thing happening in fintech next year,” compared to 16% mentioning buy-now-pay-later, 11% mentioning software-as-a-service or payment-as-a-service, and 5% mentioning embedded finance, 58% of respondents reported that they’re less optimistic about crypto than they were in 2021.

Ma guessed that that number would be even higher if the survey was answered now after the downfall of bankrupt crypto exchange FTX.

Macroeconomic changes in the last year have had a profound impact on the priorities of fintech companies.

While public fintech companies have seen their share prices cut at the knees — SoFi is down from $15.05 on Jan. 3 to $4.98 Nov. 23, and PayPal is down from $194.94 to $80.28 for the same dates — the challenges of private fintech companies have been made obvious by double-digit percentage workforce layoffs at places like Brex, Chime and Stripe.

Despite the recent layoffs, however, leaders of private fintechs are optimistic about the second half of 2022, with only 3% of companies expecting to reduce headcount. Most (81%) of respondents expect to increase their company’s headcount at least somewhat in the second half of this year.

While leaders during last year’s bull market were largely focused on fundraising, more than half (53%) don’t expect to raise funds in the near future — although some (16%) say it’s due to a lack of investor interest, most (61%) are okay with that, because they’re not in need of new funding.

Fintech companies instead plan to spend the second half of this year focusing on core priorities such as product development (49%), profitability (35%), and developing partnerships (30%). And they continue to focus on the same markets as last year, with 40% primarily targeting millennials and 37% primarily targeting low-income consumers.

“It’s clear that private firms in particular have adopted a more defensive posture for the time being — delaying new funding rounds, planning for modest (rather than explosive) growth, and addressing regulatory risks,” according to Alloy’s report.

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