5 Pointers For Getting Through The Fintech Perfect Storm
Many in the industry are uneasy as talks and inquiries about the future of fintech are becoming more prevalent against the backdrop of the economic slump. Global fintech did have its largest funding decline in the first quarter of 2022. The industry, which was accustomed to receiving the majority of financing and attention, is currently under immense strain. However, disaster is not a certainty. Despite becoming increasingly cautious, venture capital funds still make investments. Fintech investment will indeed surpass $300 billion globally by the end of 2022, as predicted. But there will surely be more competition for these investments among rapidly evolving fintech trendsetters flourishing in the post-pandemic period.
Fintech is rapidly changing the financial sector landscape and obfuscating the lines between financial enterprises and the financial sector, as the World Bank research emphasizes. In 2020, money was being thrown at these fintech startups since e-commerce and BNPL were so popular. The cryptocurrency market was also booming, with amazing ICOs and masses of worthless currencies that aroused attention. Even IoT was popular until it lost its appeal. In addition to Web3 and DeFi, carbon capture startups are currently receiving a lot of attention. It won’t be long before more businesses employ blockchain technology to track carbon emissions, which also connects the regenerative work of land managers to the businesses purchasing carbon credits.
A perfect storm appears to be brewing for fintech. Following are five themes that all players in the fintech industry should be aware of as they navigate this difficult but opportunity-filled period.
Digital transformation affects all financial organizations. Top-down strategies, sometimes known as “directed innovation,” can be cumbersome or ineffective. The difficulty lies in finding a balance between compliance and security and speed and agility. Several recent businesses that offer highly customized financial services and products—often with an embedded framework—provide a path ahead in this area. It is intriguing and frequently results in genuinely enjoyable encounters for customers. We are integrating a variety of products, including payments, loans, credit checks, insurance quotations, and more, right into the platforms that consumers use on a regular basis. This excitement is fueled in part by the novelty, surprise, and promise. One factor is how these technologies are incorporated so easily and transparently to the user.
As we look at the next wave of fintech, we will also observe a maturing market with increased robustness in terms of compliance, regulation, data security, and privacy, among other things. Perhaps collaborations with established institutions will lead to this increased focus on the fundamental underlying workings. The finest of big banks and startup suppliers will be combined in this back-and-forth, which will be a positive step toward digital transformation. Lending and embedded payments are actually only the start. We will examine a deeper degree of engagement between businesses and their customers as the next generation of embedded finance products enters the market, for instance, with embedded scoring for product suggestions.
Scalable technology with some good fortune
Any fintech startup’s ability to succeed depends on a variety of variables. from developing the ideal product or target market to fast obtaining the first paying customer, from being able to retain top talent to obtaining sufficient capital. The technology is what makes a fintech firm successful: how simple it is to integrate, how helpful it is to a complex organization, and what advantages it offers. Scalability and maximizing service value, whether through data monetisation, software-as-a-service, white labeling, or other means, are equally crucial. Time and luck are clearly two more aspects that are significant but outside the control of the majority of companies.
More focus on using alternate data sources
Businesses that learn how to take advantage of compliance and correct data handling will succeed quickly. According to the most recent survey, companies who innovate with data see a 9.5% increase in gross profits. On the other side, 67% of data innovation leaders firmly concur that they cannot keep up with the rate at which their data is expanding. As AI and machine learning technology advance, we are better able to address the issue of “too much data” and expand the use of alternative data. Over the next three years, it is anticipated that the overall median number of Machine Learning applications in the financial sector will triple alone in the UK.
In fact, by understanding their consumers beyond the study of traditional credit history data, lenders can become more profitable by using alternative data using AI & ML algorithms that Fintechs supply. A borrower’s creditworthiness may be assessed using information gathered in the context of online services, such as payment patterns (utility bills, rent, and monthly subscriptions), even if they have never previously interacted with a financial services provider. It’s especially important now that industry companies are stepping up their efforts to comply with rules while also preserving users’ data and related rights because customers are becoming more knowledgeable about data privacy.
Investors prioritize business models with regular revenue
Despite how unfavorable the market for investments is right now, there is still a lot of “dry powder” available. It is money that venture capital firms have raised but haven’t yet invested in any businesses; it must be used so that the VCs may get paid for their management fees. VCs are also much more conservative and appear to choose businesses that are profitable or have a clear route to profitability, despite the fact that this is fantastic news for the financial industry. According to a recent study of local investors, European VCs are still active but valuations have decreased, especially in the most recent stages. The visibility of future revenue for company owners is currently the focus, not the likelihood that a sales pipeline will actually close. Pay-per-use business models tend to be less popular than recurring income ones, and it appears that far more attention is being paid to determining the genuine revenue potential of current clients than that of potential new customers.
Effective leaders have a higher chance of success
Building a scaling fintech requires resiliency and hope in such a difficult environment. These qualities must be matched with experience, though. Leaders with experience are thought to have a higher chance of success than newer, less seasoned ones. You never know what you don’t know, regardless of how intelligent or smart someone is. Those who lived through the 2008 recession will recall the strategies that were effective at the time and won’t need to go through a trial-and-error process to find the successful solution. We are discussing how to survive. No time or money is available to improvise. Any uncertainty or error will only reduce the runway. Who has the cash for that?