Four major digital banking trends to watch out for in 2023

What goes up must come down – an adage fintechs know all too well right now, as startups across the sector struggle to secure funding after explosive growth. Like any economic crisis, however, the global headwinds towards 2023 will herald both winners and losers.

Older banks, for example, can weather the storm quite comfortably, buoyed by rising interest rates and an opportunity to buy from their younger, experienced fintech cousins. And crypto – on the downside – is far from out. While digital currencies are hardly immune to a worldwide recession, recent scandals have provided a tipping point for greater regulation and a possible legitimation.

Here’s my take on the changes that will take place in banking this year in what is arguably the toughest environment yet.

Farewell, fintech adventure

With corporate-backed fintech investments plunging 92% in value in the third quarter of 2022 amid widespread layoffs, 2023 will continue to see a decline to fintech’s once meteoric rise. The longer the current mood of venture capitalist caution prevails, the greater the damage will be. SVB’s latest State of Fintech report predicts that, with VC-backed valuations falling at all stages, 30% of fintech companies with more than USD 50 million in revenue have less than a year to play – rising to nearly half (44 %) of fintechs with less than USD 10 million to their name.

As intense bid stops, new more cautious market conditions will determine which fintechs stay in the game. Some of the fintechs that thrived on ample equity to fund their growth may find it difficult to continue trading, while some will be able to survive, possibly securing further investment by adopting leaner business models. The digital transformation of banking, finance and payments will not slow down as the benefits are clear to all – but innovators seeking investment will need to provide a much clearer narrative about their chosen path to sustainable growth and profitability. Realism will finally grace the world of fintech investment.

Boom time for established banks

After being on the back foot for so long, older players will have their moment in the sun this year. A hat-trick of higher interest rates, less fintech competition and a likely increase in regulatory scrutiny will possibly mean that many incumbents will find this year less challenging.

This is especially true as the transition to digital continues with banks announcing further branch closures and redundancies reducing border costs. This year will provide a real opportunity for established banks and financial service providers to consolidate their position with customers who expect their banking provider to offer both innovative solutions and financial stability.

A trend that is likely to materialize in 2023 is for established banks to acquire innovative fintech to both accelerate their digital transformation and reduce competition. This year could prove to be a golden year for M&A and CVC.

Valuations become more real

However, fintechs are far from a write-off. At the end of 2022, we saw leading brands such as Klarna and Checkout.com decide to access capital via less generous deal terms than before. We will certainly see more “down rounds” in 2023. As we said above, these less generous valuations will inevitably mean that some firms cannot secure a survival path past the difficult months ahead.

But some firms will survive and will be stronger for it. One of the outcomes of the tough economic climate is that we will see fewer fintechs, but those that survive will be much more solid. Just as the dot-com crash of 2000 led to the creation of the likes of Amazon and Expedia, 2023 is likely to see the emergence of fewer but more solid global fintech players that will be much more robust and efficient than today’s players.

Organizations with access to capital will be able to be part of the success story of these fintech survivors. Beyond the CVCs mentioned above, Big Tech should also see the opportunity to invest in the best fintechs at an irresistible discount. These investments could give Big Tech the opportunity to expand its offering to its existing users with something it has struggled to deliver in the past – financial services its customers actually need.

Crypto’s Comeback Moment?

A big question at the end of 2022 was whether the crypto markets would survive in 2023. In other words, the latest turmoil is the end of the beginning – but far from the beginning of the end. The meltdown of FTX and other related scandals has resulted in much deeper soul-searching on the nature of cryptocurrencies and distributed ledger technology.

Two trends seem to be emerging: existing financial services players recognize that crypto is not a fad that will disappear, and secondly, governments and regulators realize that they need to set some rules and guidelines if they want to avoid even bigger mishaps in the future.

This does not mean that we will see an immediate recovery of cryptocurrencies in 2023, but will see them become more “normal” and acceptable by the wider financial establishment. Having awakened banks and regulators to crypto’s potential, we will now see an onslaught of regulatory and compliance solutions – with major markets scrambling to launch the first digital central bank digital currencies (a competition the Eurozone is well positioned to lead). With investor protections in place, consumer confidence will return, leading to the next step in crypto evolution.