How fintech can adapt to a tougher environment

The author is the CEO of Fidelity International

It would be easy to sympathize with Henry Kissinger when he quipped, “There can’t be a crisis next week, my schedule is already full.” Stress in the banking sector and the “shotgun wedding” of lenders like First Republic have added a layer of volatility to an already challenging economic and financial outlook.

For some, it may revive bad memories of the turbulence of 2008. But the years after the financial crisis saw a positive burst of creativity in the fintech sector, and the application of a startup ethos to financial problems. It was spurred by changing consumer behaviour, advances in technology and connectivity and by ultra-low interest rates.

Any change in environment brings a change in mood, and the current one is no different. The rapid tightening of economic conditions after years of relative stability and cheap funding is leading to a sense of concern in the fintech industry.

While economic cycles may come and go, this one has the potential to be particularly challenging for those firms that rely on funding from private investors, who themselves are under greater pressure to produce returns as exit opportunities and valuations decline.

Private company funding in the fintech sector fell by about two-thirds year-over-year in the fourth quarter of 2022, according to Financial Technology Partners. That number ticked up in the first quarter of this year, but much of that was due to Stripe’s $6.5 billion funding round at a $50 billion valuation, 47 percent below its peak in 2021. The actual number of funding rounds has also picked up up. to 794 deals in the first quarter from 681 deals in the last three months of 2022, according to the FTP data. But it still remained below the increased levels achieved in 2021 and early 2022.

Fintech firms now operate in a more competitive environment than before, and the battle for both cost-conscious customers and increasingly cautious investors will intensify. It will force many companies to focus on survival in the immediate future, and a faster path to profitability, rather than growth at any cost.

The sudden change in market environment can, for some founders, feel like sailing into a storm in shark-infested waters. To maximize their chances of survival, they need three things: a well-drilled crew in a seaworthy boat, enough life jackets for everyone on board and, should all else fail, the ability to swim quickly to shore. Or in other words: risk reduction, contingency planning and agility. Having all three will greatly improve your chances of getting to calmer waters.

Containment strategies can come in the form of diversified products or services, as well as carefully managed finances. Preparedness, meanwhile, requires a good deal of imagination. This involves monitoring and prioritizing potential existential risks and developing response plans that can be activated at short notice if necessary.

Of all these factors, however, it is agility – or the ability to change tack and seize new business models, product offerings and financing opportunities – that will make the difference for fintech companies. With high competition for diminishing revenue sources and investments, and the difficulty of diversifying both in a small company, the incentive to make rapid strategic changes increases.

It also helps to think about when, how and what to communicate as part of changing a business. Managing it to ensure it’s the right balance between urgency and security is critical.

Long-term survival is often underestimated as a business goal, but without it, all other strategic goals are moot. It is especially important in a difficult and fast-moving environment where the rate of change seems to be increasing.

While this downturn may be the first experienced by younger firms, the recent banking crisis in the US and Europe is unlikely to be the last – and as Kissinger pointed out, a crisis never seems to strike at an opportune time. So it is the ability of an organization to keep showing up, day after day, regardless of external conditions, that forms the basis for future prosperity.

For fintech firms, the speed of decisions to improve client and funding market fit, and the ability to implement these changes quickly and efficiently, can begin to separate those who make it through the cycle intact and those who do not.

The rewards on offer will be great. The survivors of the fintech industry will find themselves in a market with fewer competitors – outperforming the other swimmers is sometimes more important than trying to outrun the shark.