In the last eight years, fintech has surged, with disruptors challenging traditional finance and ushering in customer-centric innovation. This relentless wave of innovation has reshaped financial systems and empowered individuals and enterprises worldwide.
However, the fintech sector is now facing its first existential challenge as it can no longer remain immune to a turbulent and deteriorating macroeconomic environment. As readily available funding has disappeared, the industry is under a shadow.
Fintechs need to reevaluate their business models – growth at any cost is no longer appealing to investors, whilst incumbent players have started to adopt and address customer requirements changing. In 2023, the impact of these market shifts is becoming increasingly apparent. UK fintech investment has declined by over a third, signalling a significant change in the investment landscape.
The dynamics of the fintech market have transformed. Gone are the days of an influx of pre-pandemic startups, as fewer new entrants are coming to market. Instead, established corporates are seeking a piece of the fintech pie. Survival in this unpredictable market is no longer merely about launching products and has become a relentless pursuit to prove market fit, adaptability and a clear path to profitability. Regardless of the challenges, the allure of fintech's promise remains as potent as ever. In 2023, the industry stands at the cusp of yet another transformative decade, poised to ride the waves of new technologies and emerging trends that will continue to transform the future of finance.
Robustness and reliability are changing fintech product launches
In a challenging market, innovation is still crucial and must be balanced with risk mitigation to ensure sustainable growth. In the first half of 2023, fintechs focused on improving their operational efficiencies and cash flow to help weather economic difficulties and remain attractive to investors.
Reducing operational expenses and taking a less aggressive stand with business development and growth is important. However, the new environment has changed how fintechs think about products. In the past, the focus was on narrow product propositions, addressing a specific need. While such a focus remains for startups, it is becoming increasingly apparent that this is not enough. After initially unbundling services, many fintechs are pursuing re-bundling to cross-sell to current customers and attract new ones. Re-bundling alone or through partnerships and third-party platforms allows fintechs to drive revenue and improve the customer experience, helping build a strong foundation in a volatile market.
Although a customer focus has traditionally been fintech's calling card, customer trust and loyalty are critical during tough, uncertain times when acquisition cost is heavier to bear. Smaller service providers are less able to accommodate the acquisition cost and will struggle if they lose focus on consumer loyalty and trust.
Using industry expertise to start small and test big
Fintechs are under pressure to raise funds with evidence of product market fit. Corporates, even though they have the necessary funds, are under budgetary constraints and reluctant to spend large amounts before validating a concept. Having a Minimum Viable Product (MVP) with functions and minimal features is enough to win early-adopter customers, but not so many that significant time and money are invested in creating them is essential. To meet these new market requirements, fintechs, startups, and corporates would greatly benefit from teaming up with established embedded finance players who can help them through the process.
Teaming up with infrastructure providers helps fintechs and corporates demonstrate market traction. Traction has become more important than ever - the progress and momentum of a business will sway or deter investors and determine whether a startup receives any part of the dwindling fintech investment pot. And tine corporate boardroom it will make or break an initiative. Traction is measured in various ways, including revenue, user percentage growth, burn rate, revenue, retention and the quality and quantity of partnerships. startups should keep a close eye on these metrics, especially when profitability is tough to achieve in the current economic climate.
Gone are the days of growth at any cost
Profits may be harder to achieve, but profitability should still be a fintech’s goal. Gone are the days of growth at any cost, as seen by the sacking scythe still sweeping across the tech sector: as of the first of August, the total number of tech layoffs in 2023 exceeded 220,000, more than the total number in 2022. Focusing on revenue and profitability instead is the key to long-term sustainability. Pride must be set aside to allow growth ambitions to temper with financial prudence.
Of course, there are many ways fintechs can try to achieve this. Forging partnerships, such as with embedded finance providers or banking institutions, allows fintechs to increase their customer base, enter new markets, improve brand recognition and gain more industry and regulatory knowledge. As outlined by McKinsey, programmatic M&A strategies and shrink-to-grow approaches that prune slow-growing areas can help businesses with patience and foresight build long-term growth.
The fintech landscape may be changing, but reduced investment isn’t the death knell for growth and innovation. On the contrary, it is a wake-up call for sustainability and a correction for the industry to reset the foundational principles to strategies that focus on building sustainable growth instead of short-lived, instant gains prone to wither in harsh economic conditions, fintechs still have the power to reshape the financial world.