Fintech in 2023 and beyond
Fintech funding skyrocketed in 2021, reaching an all-time high. According to CBInsights’ State of Fintech 2021 report, a total of 633 deals were completed, representing a total value of $132B.
But in 2022 the tide turned. With a 46% decrease compared to the previous year, global fintech funding reached just $75.2 billion in 2022. The number of mega-round financings fell 60%, and fintech unicorn births decreased 87% compared to 2021 (CBInsights State of Fintech 2022 -report).
In order to set the right expectations for 2023 and beyond, it is important to properly assess what happened during this downturn. Is this drop just a recalibration, or does it represent a total collapse of the fintech sector? Was 2021 the anomaly, or 2022? Will the recent situation lead to a major transformation in fintech? Let’s take a closer look.
The fintech funding boom of 2021
There had already been a steady increase in fintech investment in the decade to 2021. But the upswing in 2021 seemed a bit frenetic – not unlike the gold rush of the 19th century and more recently the investment frenzy for internet companies before the dot-com bubble of 2000.
Fintech, a similarly disruptive technology-based sector with huge potential, led to a funding boom for about a decade. This funding peaked in 2021 driven by FOMO – fear of missing out – and an abundance of funds available following the monetary policy implemented during the pandemic.
The Fintech Funding Decline in 2022
“At some point during this process, valuations … went out the window. To me, this makes no sense at all, and reminds me of how e-commerce startups with fancy domain names were valued in the billions in the early 2000s .”
Primarily, fintech funding appears to have been affected by the current market’s negative outlook and a general slowdown in the global economy. Research from JP Morgan and Bank of America predicts that this downturn will last until the last quarter of 2023. The ongoing war in Ukraine, widespread post-pandemic inflation and expectations of a global recession have led to a loss of appetite for corporate investment, and at least changed the investor’s assessment of investment opportunities.
More specifically, the investment outlook has become more cautious, with investors taking a more precautionary approach. But should this come as a total surprise? EMBank founder Ozan Özerk’s comments from 2021 anticipate the current situation: “At some point during this [fintech investment] process, valuations based on the economic fundamentals went out the window. To me this makes no sense at all and reminds me of how e-commerce startups with fancy domain names were valued in the billions in the early 2000s.”
Recalibration against caution
The bursting of the dot-com bubble did not end the Internet economy, but streamlined it to good effect. Survivors like Google and Amazon became sector leaders, while new internet startups were forced to come up with stronger ideas, better products and more robust business models to receive funding.
Seen in this light, 2022’s decline in fintech funding seems more like a normalization process than a catastrophe; In fact, the current transition is not as unfriendly as the one in 2000. Now investments are being carefully recalibrated, focusing more on quality as opposed to quantity. In this way, the investments turn towards more profitable and recognized companies. Considering all these aspects, the current slowdown in growth can be seen as a period of maturity leading to a solid establishment of strong fintechs.
Where does Europe stand?
Europe appears to be the least affected region in the current downturn in fintech funding. This is, among other things, because Europe’s fintech regulations correspond to a more prudent investment perspective. By following this regulation, European fintech has become what investors are looking for and thus has been least affected.
EMBank’s view of fintechs
At EMBank, we consider the current period as an opportunity for equilibrium. After this year’s adjustments and regulatory changes, the fintech ecosystem will be healthier than before. We value the business model and determine (or even invent) the unique solution for each company, including not only fintech, but also B2B2B, B2B2C, SME and supply chain providers.
Today’s current conditions match our banking mindset because we prefer quality over quantity and believe in expertise and prudence. We will continue to work with fintech start-ups without traditional, more conservative banking reflexes. We believe that fintech acts as the catalyst that accelerates other businesses and always see the fintechs not only as customers but also as our partners. In embedded finance, for example, forming a tripartite partnership with a retailer and a payment provider seems not only plausible, but beneficial to all parties, including the market itself.
The fintech market will continue to offer more and more, exponentially multiplying its value. This growth will be multi-dimensional, as the previous focus has mostly been centered on the consumer dimension, and therefore many business model potentials remain to be discovered. Banks with a smart vision and ability to perceive the potential of such fintech start-ups will provide growth and create a holistic ecosystem for fintech financing.
Being based in Lithuania also helps the healthy growth of our fintech business. Aiming to become a fintech hub, Lithuania offers a lot of potential, as represented by its 11th place out of 190 in business creation capabilities. To this end, we are currently working on funding programs for fintech start-ups and local businesses in collaboration with Invest LT.
How does EMBank react?
As European Merchant Bank (EMBank), we understand the nature of fintech business: as such, we can evaluate and assess their needs before formulating a solution. As a challenger bank, we are flexible to our clients’ requests, which include fintechs, SMEs and corporates, by focusing on innovative solutions delivered with a human touch, rather than rigid procedures and tedious bureaucracy. We invest in building our organizational capabilities to build processes and flows that better mitigate possible risks, making us solution-oriented partners for credible, compliant and competent fintechs.
If you are looking for a dynamic bank and an extraordinary collaboration, please send an email to [email protected] to arrange a telephone call.
