SEVEN financial predictions for the coming year

David Jarvis is the CEO and co-founder of Griffin, a leading bank-as-a-service provider that helps companies build and launch financial services products. He shares his insights for the year ahead – from the impact of high interest rates, to digital sovereignty, to the regulatory changes we can expect from 2023 and the implications for the fintech industry and beyond. According to Jarvis, this is what we can expect to see in the coming year.

1. High inflation is not going away

We are heading into major macroeconomic headwinds, and these winds will not subside in the foreseeable future. Inflation is driven in part by the war in Ukraine, but also by broader and more entrenched concerns about globalization and national security.

Global supply chains have played an important role in driving down prices, but the pandemic has forced us to recognize that they are also incredibly fragile. The trend towards globalization is now reversing, with countries moving to make their national supply chains more robust – except that much of the infrastructure to support this move does not exist today and will require major investment. This will continue to drive price increases as countries continue to pour money into propping up systems that were never and never will be as efficient or cost-effective as globalization.

2. Tech companies and VCs must evolve to survive in a high interest rate environment

If you’re under 40, virtually your entire working life has been defined by an economic environment where interest rates were zero. Right now, we’re seeing the market continue to engage in a significant amount of wishful thinking to return to that environment. That will not happen. The zero interest rate environment that persisted for the past twenty years was extremely abnormal, and much of what millennials and Gen Z know about the world is going to change in ways we are not well prepared for.

From a funding perspective, we now have a whole generation of venture capitalists who have never had to face a zero interest rate environment. This is possibly why a lot of deal-making is on hold right now – people need time to learn and adapt. With higher interest rates now flowing into their financial models, venture capitalists need to rethink how they build these models and the implications this may have on portfolio profitability.

Startups and technology companies must do the same. They need to step back and assess whether their current models are sustainable in a high interest rate environment. The ability to secure credit and leveraged debt is also likely to be affected, and companies need to prepare for this and determine how it may affect their plans to scale.

3. Data sovereignty (or digital) will become the norm

We don’t really have one internet anymore: instead we have several regional networks governed by different laws, regulations, data retention requirements and data protection requirements that are in many cases structurally incompatible with each other. I expect we will continue to see a push towards data sovereignty in the coming year. Data sovereignty refers to information that has been converted into digital form and remains under the laws of the country in which it resides.

China has done this successfully, while the EU and Russia are pushing for it. It is possible that Western democracies will try to stay in line with each other, but they may also not want to because the EU sees the US as a threat and is not necessarily interested in playing nice. Whatever form it takes, the push for data sovereignty will be a long-term trend with lasting impact on the technology industry and on individual users’ experience of the internet.

4. Crypto will become a high priority for regulators

FTX collapsed from a good old fashioned bank run. The demise of one of the largest and seemingly most “stable” crypto exchanges shows that these businesses are not so unique. In fact, they are highly susceptible to many of the same pitfalls and vulnerabilities that affect most financial services firms. Traditional financial services firms have a good model for how to manage these risks – they are well understood, in large part because of financial regulations that require a basic level of mitigation to make it harder to take risks that could harm clients. The fact that crypto businesses are so prone to these mistakes – by virtue of sitting outside the regulatory framework – is both a systemic risk and also very bad for consumers. And then in 2023, I expect an aggressive push to bring crypto into the regulatory framework.

5. Faster regulatory processing, but more scrutiny of compliance

The FCA has cleared its Brexit and fintech boom backlog, and new business models such as open banking are becoming more mainstream. This will lead to applications being turned around much faster and more new fintechs appearing than in recent years. However, we have also seen regulators put pressure on fintechs to be transparent and require greater compliance controls to be put in place.

With the recent collapse of companies like FTX, we should expect regulatory changes around transparency and accounting. More specifically, these regulations could be much stricter and more extensively monitored. I expect that a continued regulatory trend will make it more difficult to run such businesses. It will flow through to the increased ability to perform automated verification, especially on companies.

6. “Zombie companies” will die

A high interest rate environment flushes out many “zombie companies” – which are not viable in this economic climate. When fintechs need to return another 5%-7% a year just to keep up with inflation, companies that have survived on securing cheap capital will die. These will mostly be medium-sized and large companies that are listed on the stock exchange. They previously survived by loading up debt and not actually delivering returns. But when the cost of the debt increases, they go to the church.

Many startups that have terrible unit economics will also die. There will be no funding for the likes of grocery delivery or scooter companies for a long time. The amount of capital that flowed into companies with terrible unit economics was capital that simply had nowhere else to go. But the age of cheap money is over, and the companies – big and small – that depended on it to survive will suddenly find no way out.

7. Embedded Finance will be fully embedded

Embedded Finance is already here, but it’s really going to take root next year. Businesses will look for every marginal pound they can get. This benefits the built-in finance statement: “I have this customer relationship, I have data, there’s a way for me to both improve the customer experience and monetize it at the same time.” It’s a natural win-win, and I expect companies to continue to double down on embedded finance for that reason.

Both B2B and B2C businesses will look for ways to integrate banking and financial services directly into the user experience. Whether it is an invoicing platform that wants to offer credit to customers or a Neobank that wants to offer savings accounts to consumers, businesses will look for ways to diversify their income via financial services.

While the year ahead will certainly have its challenges, it is during economic downturns that some of the most innovative and successful companies are born. Startups and large enterprises must evolve with the new reality and make smart choices about what they build and how they create operating and capital efficiencies. And although this shift in mindset can be challenging, it presents a unique opportunity.