Legacy banks, for example, may weather the storm relatively comfortably, buoyed by rising interest rates and the opportunity to acquire from their younger, smarter fintech cousins. And crypto – down – is far from out. While digital currencies are hardly immune to a global recession, recent scandals have provided a tipping point for greater regulation and possible legitimation.
Here’s my take on the changes that will happen in banking this year in what is probably the toughest environment yet.
Goodbye fintech talk
With corporate-backed fintech investment collapsing 92% in value in the third quarter of 2022 amid widespread layoffs, 2023 will continue to see a slowdown in fintech’s once meteoric rise. 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$50 million in revenue have less than a year to operate – rising to almost half ( 44%) of fintech companies with less than US$10 million to their name.
As intense bidding winds down, the new, more cautious market conditions will determine which fintech companies stay in the game. Some of the fintech companies that thrived with abundant equity capital to fund their growth may find it difficult to continue trading, while some will manage to survive, possibly securing additional investment by adopting leaner business models. The digital transformation of banking, finance and payments will not slow down as the benefits are clear to all – but innovators seeking investment will need to provide a much clearer narrative of their chosen path to sustainable growth and profitability. Realism will finally grace the world of fintech investment.
Boom time for existing banks
After being on the back burner 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 likely increased regulatory scrutiny will likely mean many incumbents will find this year less challenging.
This is particularly true as the digital transition continues, with banks announcing further branch closures and staff cuts, reducing upfront costs. This year will provide a real opportunity for existing banks and financial service providers to consolidate their position among customers who expect their banking provider to offer both innovative solutions and financial stability.
One trend likely to materialize in 2023 is that of incumbent banks acquiring innovative fintech technologies to accelerate their digital transformation and reduce competition. This year could turn out to be golden for corporate M&A and CVC.
The grades are getting more and more real
However, fintech is far from being written off. At the end of 2022, we saw leading brands like Klarna and Checkout.com decide to access capital through less generous deal terms than in the past. We will certainly see more “crashes” in 2023. As we said above, these less generous valuations will inevitably lead to some firms not being able to ensure survival beyond the difficult months ahead.
But some businesses will survive and be stronger for it. One of the results of the difficult economic climate is that we will see fewer fintech companies, but those that survive will be much more robust. Just as the dot-com crash of 2000 led to the creation of companies like Amazon and Expedia, 2023 is likely to see the emergence of fewer but more robust global fintech players that will be much more resilient and effective than current players.
Organizations with access to capital will be able to be part of the success story of these fintech survivors. Apart from the CVCs mentioned above, Big Tech should also see the opportunity to invest in the best fintech technologies at an irresistible discount. These investments could provide Big Tech with the opportunity to expand its offering to its existing customers with something it has struggled to provide in the past – financial services that its customers actually need.
Crypto Comeback Moment?
One big question at the end of 2022 was whether crypto markets would survive 2023. The recent turmoil, in other words, is the end of the beginning – but far from the beginning of the end. The FTX crash and other related scandals have led to a much deeper investigation into the nature of cryptocurrencies and distributed ledger technology.
Two trends seem to be emerging: existing financial services players are recognizing that cryptocurrency is not a fad that will go away, and secondly, governments and regulators are realizing that they need to set some rules and guidelines if they want to avoid even bigger mishaps in future.
This does not mean that we will see an immediate recovery of cryptocurrencies in 2023, but we will see them become more “normal” and accepted by the wider financial circle. Having awakened banks and regulators to the potential of cryptocurrency, we will now see an onslaught of regulatory and compliance decisions – with major markets racing to launch the first central bank digital currencies (a competition the Eurozone is well-placed to lead) . With investor protection, consumer confidence will return, fueling the next stage of crypto evolution.