What will a recession mean for the fintech sector?

KPMG categorised 2021 as a “remarkable year” for the fintech sector. It saw a record number of deals in every major region – including the Americas, EMEA, and the Asia-Pacific.

But what’s ahead in 2022/23? Rising interest rates, spiralling inflation and market volatility make the prospect of a recessionary climate more likely. What will this mean for Fintech?

The sector has a lot to celebrate. The type of fintech solutions attracting investment has soared. The hottest products now are focusing on cryptocurrencies and blockchain, wealth-tech, and cybersecurity.

We’ve also seen stronger partnerships between traditional and new offerings. Financial services have expanded their reach into a broader range of daily transactions, through the use of embedded banking, insurance, and financial products.

Legacy structures, in the past, may have stood in the way of the speed of this development.

But there has been a growing realisation by incumbents that by re-imagining what’s possible through fintech, there are huge opportunities to become more robust and create unique value for customers, clients, and investors.

More banks are now offering embedded solutions.They are changing their inward focus towards becoming financial service providers to non-bank and non-financial institutions as a component of a larger offering.

Rather than taking a build or buy stance, banks have seen that they can get the best of both worlds. By partnering with nimble, innovative fintech companies, they can win flexibility in the range of products and services they offer.

By making use of fintech’s flexible deployment options, such as APIs and customizable feature sets, they can be set for long-term win-win collaboration and speed to innovation.

Venture Capital investment globally reached a record $115 billion in 2021. This is a step change from the previous high of $53.2 billion set in 2018. The big areas of interest? Crypto and blockchain have led the charge.

Globally, too, we’ve seen massive interest in the potential role of crypto and its underlying technologies in modern financial systems. This includes the central banks. Many are considering the development of their own digital currencies.

We’ve also watched the maturation of the so-called ‘challenger banks’ – the likes of Monzo, Starling, N26 and Revolut. These are no longer in their infancy. Instead, they are cementing their positions in the mainstream and winning public confidence.

Indeed, Anne Boden, CEO of Starling Bank, has said the bank should be ready to float on the open market by the end of 2022.

The fact Starling is readying itself for an IPO is a big step forward in the evolution of the challenger bank sector. Many believe it will be the beginning of a run of similar offerings.

But what’s the bigger picture given that a global recession is likely sometime in 2023?

There are two scenarios. And each depends on the level of maturity of the fintech organisation.

A recession would hit hardest those fintech startups that lack the capital and assets of their banking competitors to withstand market pressures.

These are the ones now shored up by investor optimism, hype, good intentions and over-heated markets. “When the tide goes out, you’ll know who’s swimming naked,” James Allum, SVP and regional head of Europe at fintech Payoneer, has said.

Swedish BNPL fintech Klarna’s valuation plunged 85% to $6.7 billion in July. Trading platform Robinhood is cutting nearly a quarter of its staff due to high inflation and the falling cryptocurrency market.

But for those fintechs agile enough to take advantage of the changing economic climate, the scenario is more optimistic.

Those who can provide tailored products and services in supporting companies and individuals in dealing with the financial challenges brought on by a recession will be the ones to prosper.

Who will these be? Time will tell. The challenging conditions will be the reality for all financial institutions – including the big banks.

The simple fact is that investors will continue to pour their billions into the ones that survive the fittest – by delivering the best and most efficient innovations to provide the services we all need the most …