Which sectors have the greatest potential?
It’s been quite an eventful year. Fintech has fallen a long way from the highs of 2021, and while 2022 was largely about the reset of the funding environment, 2023 is going to be a year of recalibration for fintech companies.
The great news is that large enterprise and midmarket companies care more than ever about bottom-line impact. As revenue growth slows down, cost savings and efficiency have become critical. Larger companies are more likely to cut back on internal innovation efforts and technology investments that are not core to the business.
This opens the door for fintechs that can deliver real improvements to the bottom line by eliminating manual processes and saving their customers money.
First, let’s take a look at the sectors likely to be most challenging: lenders, neobanks and fintechs that serve SMBs.
Lending is going to be hit hard. Lenders have to manage three big tailwinds in today’s market:
- Rising delinquency rates and charge-offs.
- Higher cost of capital for the debt they lend.
- Decreasing demand from customers because of higher interest rates.
Focus on how technology can solve hard problems, and don’t worry as much about finding what’s cutting edge in fintech.
The rise in delinquency rates and charge-offs from non-paying customers will be tough to manage for newer fintechs that have been operating for less than five years. These younger companies don’t have the models fully built out to predict which customers are likelier to default.
Managing risk during a downturn can be brutal, and lenders will feel this most acutely.
Neobanks transformed the customer experience of traditional banks by offering better digital products and lower costs. While big players, like Chime, who raised large amounts of capital will be fine, expect to see consolidation among the smaller neobanks.
The reality is that many neobanks have customers with small average deposit balances, and deposits are critical to banking business models in the long term. Neobanks will also be downstream victims of layoffs — if any of their customers are laid off, the banks will see their direct deposit flows diminishing.
Fintechs serving SMBs
Small businesses are more likely to shut shop during a recession. In turn, fintechs that serve SMBs rather than larger midmarket and enterprise customers are more likely to lose their SMB customers. This is why you already see businesses like Brex moving away from serving SMBs.
The opportunities for fintechs in 2023 lie in the “boring” areas like fraud, compliance, payment operations, taxes and infrastructure. CFOs will be more focused than ever on bottom-line impact. Fintechs that are able to demonstrate a measurable improvement in payment authorization and reconciliation rates or a reduction in fraud will be able to weather the downturn and grow.