Inflation creates hidden opportunities in Fintech

Inflation. CPI index. Core inflation.

Inflation is a market reality, no matter which term you use. And that reality will affect any fintech startup’s growth trajectory. As an investor, inflation is just one of many considerations when constructing an investment mission, fundraising for a new fund or creating value in an existing fund.

I don’t see inflation as a binary cut-off value that answers the question of investing. Instead, I see it as a metric that exists on a spectrum, which informs how to invest. This applies to both equity investments and debt investments.

In today’s business landscape, inflation can create new opportunities within the fintech market.

High inflation is a catalyst for the onset of financial well-being

Let’s start with high inflation, but first I want to clarify that I’m not talking about the bond market. I’m not talking about stock markets. I’m certainly not talking about the pressure building up on corporate balance sheets.

I want to talk about what happens on an individual level to keep this brief and avoid creating a novel.

In periods of high inflation, the individual will feel pressure. The individual will feel stretched.

For simplicity, I will assume that individual incomes may not keep pace with inflation during periods of high inflation.

Common sense also tells us that the expense lines of an individual are going to increase. The price of goods and services used by the individual will increase.

The individual’s gross margins and net margins will decrease. Individuals will have less cash on hand. Individuals are also likely to start seeing a reduction in their savings. The proportion of the population living paycheck to paycheck is likely to increase.

Deflation creates opportunities for interest-bearing products

Let’s switch to the other extreme: a deflationary environment.

Common sense tells us that the individual will feel more flush with cash as the prices of goods and services fall. In some geographies and cultures, the proportion of the wallet dedicated to savings is increasing. In other societies, consumer debt will increase.

However, there is still pressure.

People with a propensity to save will seek higher returns on their cash, while other consumers will need debt management and possibly debt relief.

There also remains a possibly reduced but still present segment of individuals who will still live paycheck to paycheck.

How to find secret opportunities

Inflationary cycles open up new opportunities to be useful and alleviate compounding stressors.

In the fintech space, doors are opening to invest in a whole segment of startups that address the pressures felt by individuals.

The question is not whether to invest – the answer to that question is of limited use. The question that precedes these “secret” opportunities is how to invest.

What needs arise when inflation is high? Emergency relief, housing insecurity, food insecurity, alternative protein sources, extending the life of owned or financed assets and debt counseling and restructuring – to name a few.

During deflation, there is a need for fractionalization of investment products as well as educational products around the responsible use of debt.

This is why inflation is only one – dare I say, minor – factor I consider in my investment rubric.

Necessity creates opportunity

When evaluating whether it is a “secret” opportunity, the main question I ask is: Does this investment opportunity relieve the pressure that results in better results.

Pressure is another word for an unmet need. Necessity is the mother of invention. Invention creates possibilities. According to the transitive property, necessity is possibility.

As such, investors and fund managers alike may see difficult economic conditions as the perfect time to see the glass as half-full and identify undervalued, overlooked startups with long-term potential.

There’s never been a better time to be a fintech optimist.