Fintech can’t stay out of the headlines, especially for the wrong reasons. The past year has seen the spectacular collapse of cryptocurrency exchange FTX, while the ex-chief executive of Binance, the world’s largest crypto exchange, has pleaded guilty to money laundering as part of a $4 billion settlement between the platform and the US Department of State. Justice.
No wonder investors are reluctant to put their money into disruptive fintech startups.
Combined with rising interest rates and inflation, investors have held onto their money — ending the pre-pandemic era of easy money — making it harder for fintech startups to raise capital.
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According to KPMG, total UK fintech investment fell to $5.9 billion (£4.6 billion) in the first half of 2023, down 57 percent from $13.8 billion in the same period in 2022.
So, will it be the same this year?
Nick Sando, fintech director at Octopus Ventures, believes fintech is now entering a period of stability compared to last year.
Sando says, “The last three months have been particularly active… it’s really picked up in the last few months because people feel like we’re over the worst.”
‘The largest companies are built against the backdrop of market declines’
Nicholas Sando, director of Octopus Ventures
According to Sando, being in the depths of a recession can be beneficial for fintech founders because there is less competition for investors’ money and an IT labor market that has seen massive layoffs after the pandemic means you draw better people. can choose.
“Although it can be intimidating, it is also incredibly exciting. The largest companies are built against the backdrop of market downturns. In times like these, opportunities arise,” says Sando.
If there’s one overarching theme among the fintech trends in 2024, it will be consolidation in the sector, whether it’s big banks buying disruptive fintech startups or bigger brands absorbing these companies as part of a bundled financing offering .
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Given the decline in fintech investment, fintech founders could be grateful if a big bank comes knocking; After all, banks have been taking interests in fintechs for years.
The appeal of bundling your disruptive fintech app with a bigger player is that it solves the biggest problem fintechs have faced: getting in front of customers. For example, one of the ubiquitous accounting software providers, such as Xero or Sage, might offer loans if they notice you have a cash flow problem. This bouquet of financial products, known as “embedded finance,” will be one of the most exciting developments in fintech, Sando says.
Another fintech trend theme that won’t go away is the importance of cybersecurity and anything that protects fintechs from cyber attacks.
“There really is an increased focus on cyber risk and operational resilience is a real issue across the thousands of critical infrastructure and private businesses that are really being affected,” said Simon Crown, co-head of the fintech practice at Clifford Chance.
Future trends in the fintech industry
Growth company has identified nine future fintech trends for 2024 and beyond.
One area that particularly fascinates Sando is climate fintech, which covers carbon emissions accounting, carbon offsetting and ESG compliance. “All these solutions are now being built while the train is moving at 100 kilometers per hour,” enthuses Sando, whose Octopus Ventures recently invested in carbon accounting software startup Minimum.
Decentralized Finance (DeFi)
Decentralized finance platforms (DeFi) will become mainstream. These use blockchain technology to eliminate middlemen from receiving commissions, thus reducing the cost of money. Consider how Wise disrupted the foreign exchange market by undercutting the banks. DeFi startups will also disrupt the lending, credit and insurance markets.
AI offers financial advice
Imagine an Alexa as your personal financial advisor – there will be opportunities for AI-driven personalized investment and spending advice.
The big question when it comes to AI-driven chatbots that offer financial advice, for example, will be governance and supervision. Who will ultimately be responsible if the AI advice is unclear or leads to losses? “What senior managers will be thinking about is the Frankenstein effect – what have we created?” says Kroon.
Tokenization of assets
Blockchain technology will allow small investors to own shares of hugely expensive things, whether it’s real estate, fine art or classic cars. Combining tokenization with distributed ledger technology (blockchain) offers many opportunities to create a whole new wave of innovative products and services, of which programmable money could be one.
America embraces open banking
Open banking started as a UK government initiative to break the stranglehold of traditional providers on personal finance. Major UK banks were for the first time forced to share their customers’ data with third parties such as fintechs, enabling the launch of disruptors.
U.S. regulators announced measures in October to allow consumer data sharing, as they have in Britain, Australia and Europe, making it easier to switch bank accounts. The Personal Financial Data Rights rule will, for the first time, guarantee Americans free access to their banking information, allowing them to share that data with third parties.
This new open banking rule requires banks, as in Great Britain, to provide application programming interfaces (APIs) that allow data to be easily shared.
On the face of it, the US offers huge opportunities for UK fintech startups, as Britain has long been the most innovative fintech market in the world (before the EU caught up).
However, Simon Crown warns that the US would be a tough market for a British startup to crack, given the different regulations, which would mean working with an American company.
One key difference, however, is that open banking has gained political support here in Britain, which may not be the case for Democrats or Republicans after next year’s election. Opening American banks to foreigners would not go down well with protectionist Donald Trump.
“Everything in America is at risk of politicization,” Crown says.
Another problem is that the huge costs of implementing open banking have fallen on UK banks, rather than the fintechs that could benefit from access to their data. Given that there are more than 9,000 banks and credit unions across America, most of which would need to implement open banking, many of these mom-and-pop banks would be unable to bear the costs of opening up, just like the British majors banks.
In a saturated market in terms of the number of fintech startups, it is now cheaper to buy an existing fintech than to build one from scratch. M&A activity has been on the rise and is expected to grow this year as fintech valuations decline. This consolidation phase, which reduces the number of new startups, signals a more stable fintech ecosystem.
Buy now, pay later for businesses
Although BNPL was initially used for lower-priced fashion purchases, its application has expanded. BNPL is now offered in corporate and non-discretionary purchases, such as healthcare, legal services and auto repairs.
Embedded Finance requires technology to build into products and services the ability to transfer money under certain circumstances, such as paying for an Uber car from your bank account immediately after the ride. Consumers pay without having to consciously take out their debit card. The payment takes place in the background and is invisible to the consumer.
For example, an online travel agency has experimented with offering loans to pay for package holidays when you book a holiday. Booking and paying for your holiday, rather than going out to swipe your credit card, is one transaction.
As such, embedded payments are becoming increasingly common across all B2B2C and B2B2B business models, such as platforms and marketplaces. Embedded payments are expected to scale using emerging technologies such as AI, distributed ledgers, augmented and virtual reality, 5G and IoT.
Sando predicts that larger brands will buy disruptive fintechs, especially when it comes to offering embedded financing. An example of this could be one of the accounting software platforms that every business should be using right now since you have a short-term cash flow problem and are offering a loan.
The question a fintech founder should ask, Sando says, is whether he thinks he would be more powerful on his own or embedded in a larger platform.
Fintechs are adopting the SaaS model
We’ve become accustomed to renting monthly software subscriptions, which ensures we’re always up to date. SaaS revenues would reach $623 billion globally by 2023, at a compound annual growth rate of 18 percent. Fintechs are also adopting the software-as-a-service model.
One of the appeals of cloud-based SaaS is that it offers enhanced security when it comes to data storage and management, something fintech startups couldn’t replicate on-premise.
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