It's been a very interesting year. Fintech has significantly declined from its peak in 2021, and while the year 2022 was largely dedicated to the rest of the funding environment, 2023 will be a year of recalibration for fintech businesses.
The good news is that midmarket and large enterprises are now more concerned than ever with their bottom-line impact. Efficiency and cost savings are now crucial as revenue growth slows. Larger businesses are more likely to reduce internal innovation initiatives and non-core business technology investments.
This makes way for fintech companies that, by removing manual processes and offering cost-savings to their clients, can actually improve the bottom line.
Let's start by examining the industries that are most likely to present difficulties: lenders, neobanks, and fintech that cater to SMBs.
Lending will take a significant hit. In the current market, lenders must manage three significant tailwinds:
rising charge-offs and delinquency rates.
increased capital costs for the debt they lend.
lower customer demand as a result of higher interest rates.
For more recent fintech companies that have been in business for less than five years, managing the rise in delinquency rates and charge-offs from unpaying customers will be challenging. These newer businesses don't yet have fully developed models to identify which customers are most likely to default.
Lenders will experience this most keenly because managing risk during a downturn can be brutal.
Neobanks improved traditional banks' customer experiences by providing better digital products at more affordable prices. While major players, like Chime, who raised significant amounts of capital will be okay, smaller neobanks should expect to merge.
Deposits are essential to long-term banking business models, but many neobanks have customers with low average deposit balances. Neobanks will also suffer from layoffs downstream because if any of their clients lose their jobs, the banks will experience a decline in direct deposit flows.
Serving SMBs are Fintech
During a recession, small businesses are more likely to close their doors. Fintechs that focus on small and medium-sized businesses (SMBs) as opposed to larger midmarket and enterprise customers run the risk of losing these SMB clients. This is the reason why companies like Brex are already turning away from serving SMBs.
The "boring" areas like fraud, compliance, payment operations, taxes, and infrastructure are where fintech companies will find opportunities in 2023. CFOs will be more concerned than ever with the bottom line. Fintechs will be able to survive the downturn and expand if they can show a quantifiable increase in payment authorization and reconciliation rates or a decrease in fraud.
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