What in the world is happening to fintech?
In the first of a two part series, Mouro Capital’s Manuel Silvez explores how 2022’s market turbulence is affecting fintech startups.
To the casual observer, fintech sits somewhere between having a mild crisis of identity and a full-blown breakdown. And, frankly, who can blame it when so much else in the world seems to be right there on the edge alongside it?
Collapsing markets, spiralling cost of living, climate and energy emergencies, war, social polarisation and political extremes all characterise today’s landscape – and fintech seems to be caught somewhere in the middle.
By almost any measure, fintech has taken a battering in the first half of the year. Funding is down by nearly half from the $40bn highs at the end of 2021 to just $20bn today. Nearly half a trillion dollars have been wiped off the peak value of fintech companies, leaving many cash strapped and hampered, or forced to accept substantially lower valuations in order to survive.
New unicorns are scarce and existing ones have seen their billion-dollar status evaporate overnight, as fresh capital all but dries up amid volatile markets and fears of a looming recession.
But despite all of that, if we take a longer-term look then the industry is still at record levels of funding compared to historical series. Even today’s $20bn investment is much more than flew into fintech in 2017 or ‘18. So, even if all the signs point to an uncertain outlook, these are uncertain times, and perhaps our impending doom is no more than a temporary dint.
Whatever the truth, most likely only time will tell. But to understand where we are today – why we are where we are today, and why fintech matters probably more than ever – we need to look closely at how we got here. And that means mentioning the ‘C’ word.
Arguably, no single event in history has had such a marked and rapid impact on human behaviour as Covid. At the start of 2019, people strapped into their seats, blissfully unaware of the white knuckle ride that lay ahead of them – the rollercoaster! And, in a digitally connected global ecosystem, the effects of something like Covid spread like wildfire.
As stay-at-home orders proliferated throughout 2020, online consumer activity shot through the roof. Already growing at a compound rate of almost 15 per cent pre-pandemic, ecommerce surged as the world went into lockdown.
Internet penetration in Europe leapt to 89 per cent and consumers turned in their millions to online platforms, making vast profits for their operators and piling on the pressure for mainstream providers to implement solutions like open banking to better bridge traditional and virtual offerings.
Fintech is ultimately the reinvention of financial services and financial services is the glue that binds economic activity. While the locked-down world embraced a new digital paradigm, fintech not only adapted to it but thrived, attracting unprecedented levels of interest from investors. For two years straight, fintech had drawn a steady, almost boring, $12bn in deal activity each and every quarter, reliably netting $50bn in annual investment totals.
And then something happened. In the first three months of 2021, fintech investment more than doubled to $28bn. It continued to accelerate over the rest of the year, rounding out at an annual investment of a whopping $140bn – fintech’s best year ever. And growth was not only dramatic in absolute terms, but relative to other verticals too. In 2020, fintech was taking about 40c out of every dollar invested in fintech, digital health and retail tech. By the end of 2021, that share had increased to 45c.
The acceleration of change brought about by Covid only boosted the sector. The broader financial services industry had been engaged in a decades-long attempt to transform itself, and Covid was the catalyst that put it into warp speed.
Special mention here ought to go to crypto: an over-indexed sector in 2021 as the result, not only of the industry’s transformation but as the encapsulation of the public’s growing interest in new technological possibilities.
2022 started out buoyed by this historic performance but struggled to keep momentum. Russia invaded Ukraine, driving the rest of the world to impose sanctions, causing the price of food and fuel to increase and triggering rapid inflation.
Cue a corresponding hike in base rates and suddenly both borrowers and lenders alike were feeling a little less ambitious. If fintech is at the core of everything, its responsiveness to market fluctuations when things go well is equally pronounced when the market cools down. As investors retreated into more comfortable investment strategies, the lack of profits – indeed core propositions – in many fintech firms left them hugely exposed.
Memories of the tech bubbles at the start of the millennium rushed to the fore, but things are different now. Tech companies are real: they are based on real fundamentals, powering real economic activity.
Today’s fintech is being built to address actual problems and contribute to an ever-accelerating industrial transformation. fintech may hang on banks’ coattails, but it occupies and expands into newly created spaces, blurring and moving the boundaries of an outdated industry that touches everything.
With that in mind (and we won’t know for sure before the year is out – there could be yet more casualties and several more quarters of uncertainty) it seems that, rather than heading into a downturn, we may be rebounding from an exceptional upturn.
An upturn with unprecedented characteristics that may not necessarily be ‘financial markets’ first, but that ultimately build on the industrial transformation that is happening in the background. If we focus too narrowly on extrapolating long-term conclusions from short term market turbulence, we may miss the bigger picture.
Whatever the swings and roundabouts, one thing is cast-iron certain: fintech is not going away any time soon. When markets have levelled and society has found its new normal, fintech 3.0 will remain as a firm and established fixture. The difference being that only the strongest players will have survived.
Those that make it through will have proven technology and assets at the core of their enterprise with sound financial management and good governance to match. They will be based on better-tested business fundamentals, with a renewed focus on governance, enterprise building and under a renewed partnership model between entrepreneurs and investors.
The phoenixes that emerge from the ashes of this market will be not just great ideas, but excellent businesses to boot.
In the second of these articles, Manuel will explore who those next great companies might be: what hallmarks identify them, and what equips them to sustain their success into the long term. Also, what geographies, industries and likely fintech spaces are going to amplify the advantage for investors in the future. This will include the market itself: the likelihood of rationalisation or acquisition; the impact of regulation; and what future for the ‘fast cash’ investment culture that has prevailed until now.
The views and opinions expressed are not necessarily those of AltFi.