FinTech start-ups are facing the rockiest market conditions since they were founded, but many are already adapting by expanding into new spaces and catering to enterprises.
FinTech is undergoing a tectonic shift.
The sector led the broader VC market’s meteoric growth in recent years, capturing $1 out of every $4 invested in the venture market at its peak in 2021.
But most FinTech start-ups, having built their businesses in the growth period since the 2008 financial crisis, haven’t endured a prolonged market downturn – according to CB Insights.
The prospect of a recession looms especially large for FinTech compared to many other tech sectors.
Some of the most well-known FinTechs, from Robinhood to Chime, rely on everyday consumers having cash to throw around — a vulnerable revenue source during a recessionary period. Meanwhile, as interest rates continue to rise from historic lows, borrowing money is becoming increasingly costly for digital lenders, dragging down their businesses.
Real estate tech firms have been plagued by layoffs this year as soaring mortgage rates and inflation scare off would-be home-buyers.
Even Stripe — the fourth-most valuable unicorn in the world based on its last funding round — is under pressure from slowing e-commerce activity and has reigned in costs.
The shift has already uprooted FinTech’s hold over the venture market. In Q4 2022, the sector drew just 14% of all VC dollars — down 10 percentage points from its high of 24% in Q2 2021.
Today’s stark economic environment threatens to upturn the current FinTech landscape.
To survive, FinTechs are already moving in 2 key directions:
- Expanding into new business lines and product features, including non-financial ones
- More vigorously targeting enterprise buyers
Banks should prioritise cloud-based core banking
The first survival tactic is accelerating diversification efforts — a long-standing goal for many FinTechs that has now become more vital than ever. Fintech leaders are bundling services to better monetise their existing customers, build moats, and reduce their dependence on now-riskier business lines.
Take Klarna, one of the biggest names in the buy now, pay later (BNPL) space. Its valuation reached $45.6 billion in 2021 — up more than 8x from its funding round just 15 months before — on the heels of the BNPL market’s rapid growth.
Since then, the space has drawn regulatory scrutiny and BNPL providers have seen losses mount as more consumers fail to pay back loans on time. The new reality has hit Klarna hard: It conducted 2 rounds of layoffs across 2022 on top of an 85% cut to its valuation in July.
With BNPL facing headwinds, Klarna is insulating itself by pushing into new product areas. In the past few months, it has rolled out features including a price comparison tool, shoppable videos, and a platform to connect creators and brands.
These steps are helping Klarna move from a pure-play financial partner for merchants to an end-to-end e-commerce tool for retailers, influencers and shoppers.
In this vein, we’ll see more name-brand FinTechs move towards becoming something resembling a “super app” — connected ecosystems where users can manage their money, shop, buy insurance, and more.
Revolut, for one, has built an arsenal of around 50 products, including salary advance, pet insurance, and business payroll.
In November 2022, it even added instant messaging functionality to enable customers to communicate with each other — a non-financial step in the mold of Asian super apps like Alipay.
Meanwhile, fellow challenger bank Nubank has engaged with numerous start-ups to expand into insurance, investments, crypto trading, and more. Today, it says its active customers use more than 3 different Nubank products on average.
Beyond new products, FinTechs are leveraging a second tactic to ride out today’s market conditions by hunting down a more stable client base: enterprises.
Consumers and small businesses are a flight risk when the market turns sour. Some FinTechs are making hard pivots to avoid that exposure.
Corporate spend management firm Brex, for one, recently announced it would drop its small business clients altogether and instead serve large enterprises and startups that have raised funding.
Meanwhile, Starling Bank, one of the UK’s first challenger banks, is pushing into the banking-as-a-service (BaaS) arena. In February 2022, it launched Engine — a cloud-agnostic, “bank in a box” technology that helps other financial services firms bring banking products to market.
Similarly, cloud-based core banking platforms — which integrate with or replace banks’ existing core systems — help banks quickly adapt to changing customer needs and lower costs across the retail banking value chain. This is a significant opportunity for tech-savvy FinTechs to sell into the world’s largest financial firms and secure a recurring revenue stream.
Even BNPL providers are now going after businesses as the end user, particularly in areas like supply chain & trade finance.
B2B BNPL providers attracted steady investment dollars in 2022, despite the broader FinTech funding drought.
Investors are prioritising the B2B side for several reasons: the average purchase size is much higher among businesses than consumers, so BNPL providers can command larger fees; and lending to profit-driven businesses is less risky than bankrolling expensive consumer purchases.
Under-pressure FinTechs are adjusting their go-to-market strategies to focus on the most stable and secure sources of revenue — whether by developing new products to hawk to their existing customer bases or building entirely new business lines.
While the old assumptions about seemingly endless growth for FinTech no longer apply, new opportunities will continue to surface for the start-ups willing to reinvent themselves.
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