It’s safe to say that we had little idea, at the start of 2022, that the second half of the year would prove to be quite difficult and possibly a turning point for the fintech sector in general.
Since more than ten years ago, low-interest rates have encouraged investment, and traditional venture capitalists (VCs) are now facing competition from hedge funds, sovereign wealth funds, and family offices. Everyone everywhere experienced a fear of missing out.
Due to the exponentially accelerated adoption of digital technology during the COVID-19 pandemic—in fact, what should have taken years to change consumer behavior only took months during this time—investments in fintech startups went into overdrive.
1. Ongoing downsizing of fintech startups This will be especially true for startups that raised money in 2021 and 2022 with a short runway and very high valuations. Many fintech firms will be forced to close their doors or sell themselves, especially those in B2C and working with retail borrowers. Some will accept funding in exchange for significant valuation haircuts, allowing them to extend their runways. However, there is some good news: pre-seed and seed startups, as well as those that are headed toward profitability, are in a better position to raise money (especially from returning fintech founders) and entice top talent from later-stage startups.
2. There will be more opportunities than ever for great talent. And this is particularly true for incumbents and startups in the pre-seed and seed stages. Employees have lost faith and confidence in later-stage startups that have gone through layoff rounds or are expected to do so soon. Because their equity is in the red, all of their top employees will quit. This means that business owners in this sector need to keep an eye out and ensure that they hire the best candidates available. Their knowledge will be incredibly helpful to you.
3. Financial inclusion and environmental, social, and governance (ESG) frameworks will be highlighted Financial inclusion has benefited greatly from the recent strong adoption of fintech, particularly digital wallets (which was accelerated by the COVID-19 pandemic), particularly in the MENA region. More than 100 million people in the MENA region lack access to financial services, and numerous initiatives are being launched by regional central banks, organizations like the United Nations Development Programme, the World Bank, the International Finance Corporation, and others to adopt fintech and promote partnerships with established players in the financial services industry. This bodes well for fintech startups focusing on ESG and financial inclusion.
4. Active mergers and partnerships between established players and fintech firms Banks are restocking their war chests in response to rising interest rates, and given the drastically reduced valuations of fintech startups currently available, they will undoubtedly go on an acquisition binge. They will either pick off their talent as startup employees go back to banks and asset managers or outright buy fintech to hasten their own development. Since JP Morgan was the most active in the fintech sector in 2022, I would also anticipate seeing more partnerships form.
5. Modifications to the cross-border remittance industry Last but not least, as a co-founder of the cross-border remittance startup Purpl, I anticipate that global remittance levels will decline from their peaks following 9% growth in 2021 and 5% growth in 2022 to $626 billion, with a potential contraction of 0-3%. This will primarily be caused by foreign workers in the US, Europe, and MENA losing their jobs as a result of cost-cutting measures or, in the best cases, saving less due to higher living expenses and lower purchasing power, which will ultimately result in them having less money to remit to their families. Having said that, this contraction will present a chance for fintech firms operating in the sector to sharpen their product and service portfolios and user experiences in order to increase their market share of their addressable market.
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