It’s been quite a bit an eventful year. Fintech is a long way from the highs of 2021, and while 2022 was largely about resetting the funding environment, 2023 will be a year of recalibration for fintech companies.
The good news is that large enterprises and medium-sized companies are more concerned than ever with the impact on the bottom line. As revenue growth slows, cost savings and efficiency have become critical. Larger companies are more likely to cut back on internal innovation efforts and technology investments that are not core business.
This opens the door for fintechs to realize real improvements by eliminating manual processes and saving their clients money.
First, let’s look at the sectors that are likely to be the most challenging: lenders, neobanks and fintechs serving SMEs.
Lending will be hit hard. Lenders face three major tailwinds in today’s market:
- Rising default rates and write-offs.
- Higher cost of capital for the debt they lend.
- Declining customer demand due to higher interest rates.
Focus on how technology can solve difficult problems, and don’t worry so much about finding the very latest in fintech.
The rise in defaults and write-offs from non-paying customers will be difficult to manage for newer fintechs less than five years old. These younger companies don’t have the models to predict which customers are likely to default.
Managing risk during a recession can be brutal, and lenders will feel it most acutely.
Neobanks transformed the customer experience of traditional banks by offering better digital products and lower costs. While big players like Chime who have raised large amounts of capital will be fine, expect consolidation among the smaller neobanks.
The reality is that many neobanks have clients with small average deposits, and deposits are critical to banks’ business models in the long run. Neobanks will also fall victim to layoffs downstream – if one of their clients is laid off, the banks will see their direct deposit flows decrease.
Fintechs at the service of SMEs
Small businesses are more likely to close shop during a recession. In turn, fintechs serving SMBs rather than larger midmarket and enterprise clients are more likely to lose their SMB clients. This is why you already see companies like Brex no longer serving SMEs.
The opportunities for fintechs in 2023 lie in the ‘boring’ areas such as fraud, compliance, payments, taxation and infrastructure. CFOs will be more focused than ever on bottom-line impact. Fintechs that can demonstrate a measurable improvement in payment authorization and reconciliation rates or a reduction in fraud will be able to weather the recession and grow.