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This article was first published in Entrepreneur Middle East.
Little did we expect at the beginning of 2022 that the 2nd half of this year would turn out to be quite rocky and most probably a turning point for the tech industry in general, and fintech more particularly. For over a decade, a low interest rate environment around the world has fueled investment with traditional VCs beginning to compete with the arrival of hedge funds, sovereign and family offices in the space. FOMO was felt by everyone, everywhere.
Investments made in fintechs went in overdrive during the Covid pandemic, due to the exponentially accelerated digital adoption (what should have taken years to change consumer habits, only took months). At the end of 2021, fintech companies raised more than $130B, and more than 100 new unicorns were born. At the end of Q3, 2022, fintech investment is now down 60% YoY and this downtrend is set to continue into 2023, but there will be winners coming out of this “correction”.
2022 offered us a glimpse of what high inflation looks like, currently at a 40 years high in the US and Europe, pushing Central Banks around the world to react aggressively, rising benchmark rates at record speed and levels, leading to high cost of funds and to a more than likely recession in 2023.
Below are my 2023 predictions for the fintech industry and more particularly for the cross-border remittance and financial inclusion sectors.
Continued down-rounds for fintech startups.
This will be especially true for startups that have raised at inflated valuations in 2021 and 2022 and startups with a shortened runway. Many fintech companies — particularly in B2C and dealing with retail borrowers — will be forced to shut down or sell themselves. Others will accept funding at steep valuation haircuts, permitting them to extend their runway. Not all is doom and gloom though, with pre-seed and seed startups, as well as startups on a path to profitability, being in a better position to fundraise (especially repeat fintech founders) and attract top quality talent from later stage startups (more below).
More than ever, great talent will be up for grabs.
Especially for pre-seed and seed stage startups and incumbents. Later stage startups that have undergone lay-offs rounds or speculated to have some coming soon, have lost the trust and confidence of their employees. All their best employees will be jumping ship because their equity is underwater. Keep an eye out and make sure you hire the best there is out there. Their experience will be invaluable to you.
ESG and financial inclusion will be in the spotlight.
Following the strong adoption of fintechs and primarily digital wallets in the past couple of years, which was accelerated by the Covid pandemic, financial inclusion has experienced some strong tailwinds, especially in the MENA region. With more than 100M+ people in the MENA region unbanked, and more and more initiatives from regional Central Banks and the likes of UNDP, World Bank, IFC and others to adopt fintech and promoting partnerships with incumbent financial services players, fintech startups tackling ESG and financial inclusion will fare well.
Strong acquisition or partnership activity between incumbent players and fintechs.
With rising interest rates, banks are replenishing their war chests and will most certainly be on an acquisition spree, given slashed valuations of fintech startups out there. They will either be purchasing fintechs outright to accelerate their own development, or picking off their talent as startup workers will return to banks and asset managers. I would also expect to see more partnerships happening, with the likes of JP Morgan having been the most active in the fintech space in 2022.
Cross-border remittances will experience a slowdown.
Last but not least, as a co-founder of Purpl, that operates in the cross border remittance space, I expect global remittance levels to come down from their highs, after a 9% increase in 2021 and 5% increase in 2022 to $626B, with a possible contraction of 0 to 3%. This will mostly be due to foreign workers in the US, Europe, MENA losing their jobs due to cost cutting or in best cases be saving less, due to higher costs of living and lower purchasing power; ultimately leading to less money for them to send back as remittances to their families. That being said, this contraction will be an opportunity for fintechs in the space to focus on their product and service offerings as well as user experience, to capture a bigger market share of their addressable market.
Written by: Karl Naim