‘Fintech winter’ is the newly coined term for this current time marked by high inflation and rising interest rates, tumbling company valuations, and layoffs across the financial technology sector.
Yet, while seasons don’t change overnight, warmer days are coming for many fintech companies, says Martin Hegelund, co-founder and chief marketing officer of Ageras.
Hegelund is a serial entrepreneur with 15 years of experience working with digital media, SaaS, and online marketplaces. His company Ageras has raised more than $100million to fuel its rapid international growth.
Those with solid balance sheets and viable business models can survive the current downturn, while some startups – especially those whose valuations have dropped – will be attractive M&A targets.
A challenging year for fintech came to a close with nonstop headlines about the implosion of cryptocurrency exchange FTX and one-time market maker Alameda Research and worries that these insolvent firms could drag much of the nascent crypto market down with them. As the new year begins, many will read the FTX stories as the latest sign that the fintech winter will be long and cold.
But seasons constantly change. And promising technology developers will come out stronger when this winter ends. Because behind the winter headlines is a consumer whose preferences and expectations have changed. The consumer wants to be served by an always-on financial system that is digital, global, flexible, and open 24 hours a day.
The developers who plan for this will still stand when winter gives way to warmer days.
The deep freeze
It’s hard to put a precise number on the layoffs at fintech companies or in the tech sector more broadly, but some analysts are trying. But the problem is that the number keeps rising.
In fintech, the cutbacks in 2022 were notable, even when putting aside layoffs in the crypto space. Aside from leaders like Credit Karma – which recently froze hiring – other companies have given workers pink slips, including Chime, which cut its workforce by 12 per cent, Opendoor, which cut 18 per cent of its staff, Chargebee, which laid off 10 per cent of its staff and Stripe, which cut its headcount by 14 per cent.
Even high-flyers like Klarna announced the intention to cut staff as the ongoing bear market took a bite out of its valuation.
Larger e-commerce players are dealing with a slowdown in business that can be attributed to inflation and consumers remembering their fondness for shopping in brick-and-mortar stores.
Wayfair and Target said their e-commerce businesses slowed considerably in 2022, while Amazon saw an online sales decline of four per cent and cut tens of thousands of jobs. Shopify, which boomed in the early days of Covid lockdowns, has experienced its own slowdown and made cuts in response.
And for privately held fintech companies, the winter has been at least as bleak. Globally, venture funding for fintech startups dropped to $12.9billion in the third quarter of this year, marking a 38 per cent drop from the previous quarter. Likewise, investments in retail technology funding dropped to $8.5billion in Q3, a 33 per cent drop from the second quarter.
Since fintech startups tend to require a lot of cash, expect to see more layoffs and potential company closures.
Whatever role you play in the sprawling fintech sector, it’s been a harsh winter.
There are brighter days ahead for fintech developers, and it’s because businesses of all kinds, including banks, credit card issuers, and retailers, will be under pressure to serve a consumer whose expectations and preferences have changed.
With a possible recession looming, consumers are currently trying not to spend money. But it’s only a matter of time before this changes. If monetary tightening brings inflation under control, the pressure will begin to ease. People will be lending, borrowing, and spending again.
And when consumers are ready to spend again, they will want to do so with speed and flexibility that was undreamed in the past.
Suppose a business wants to sell goods or services to consumers when the downturn ends. In that case, it will need to explore embedded finance systems, connected accounting software, and technologies that help them accept new payment methods.
PricewaterhouseCoopers estimates that the volume of cashless payments will reach $1.9trillion by 2025. By 2030, analysts say that cashless payment volumes will be triple what they were in 2020. And as cashless payments grow, so will the need for alternative payment methods.
Additionally, financial institutions next year will likely be looking to expand their presence in new online economies that are forming, including those that serve online influencers, gamers, and market speculators. Working with fintech startups is the way for banks and payment companies to do that.
All of this is to say that whatever is happening with the markets, the valuations of fintech companies, or the headcounts of the leading fintech companies, the demand that has always propelled new financial innovations is not growing weaker. On the contrary, even with corporate earnings down and household finances on the ropes, the demand is growing.
Finding ways to give consumers and businesses what they want—how they want it—will be the key to surviving the ‘fintech winter’. Then, when springtime comes, there will be a new class of winners.