Why are Fintech companies struggling in 2022?

After a period of tremendous growth in the Fintech industry, things have settled down. At least that’s the optimistic way of saying it. For some companies, the reality is that 2022 has brought them crashing back to earth.

This has been the case for technology companies in the financial services industry across the board. Even the best online brokerage firms struggle to keep their heads above water. If we are indeed heading into a recession, many companies may find it incredibly difficult to stay afloat.

But why is that so? What happened that made 2021 such a great year for Fintech companies, and how did it set them up for failure in 2022? Here’s what you need to know.

The success story from 2021

Economies around the world bounced back from the recession caused by the pandemic. This happened in all industries, but no industry was as perfectly positioned to benefit from the boom as the Fintech industry. Financial services are needed by everyone, and people started moving online faster than ever before.

The fact is, traditional banking had overstayed its welcome long before 2020. But in matters as sensitive as personal finance, people are reluctant to embrace change. Fintech companies offered convenience, but they had not gained the trust of many, especially in the older generations.

The pandemic changed that, as people of all ages learned to embrace technology in all areas of life.

This led to a boom in the Fintech industry. Existing companies saw an influx of new customers. A wealth of new companies received their first major rounds of funding. The views were incredible. 2022 turned out to be a massive wet carpet.

2022: What Happened?

Towards the end of 2021, inflation started to become a real problem. Costs increased, causing concern among consumers. However, higher interest rates should bring balance back to the economy.

A number of factors in 2022, many of which were triggered by Russia’s invasion of Ukraine and subsequent sanctions, only made inflation worse. Supply chains broke down and delays in all industries became inevitable. Individuals and businesses struggled to keep up.

This has led to fears of a massive recession. Some experts believe we are already in a recession. Recessions are especially bad for industries that have just experienced a boom.

Why Fintech?

The problem is that during a boom, companies that otherwise would never have gotten off the ground get funding. These companies may not offer an important product or service, but people will probably choose to use what they offer when the money is flowing. When the money stops flowing, these products and services are the first to go.

Just about every tech-savvy person in 2022 has a bunch of Fintech apps on their phone that they never open. These are the types of services that seemed unique and useful a year ago, but no longer justify their existence.

But why has this hit Fintech companies so hard? Well, Fintech products and services are only useful when there is cash flow. When you make a lot of payments, payment apps are great. When investing money, investment platforms are necessary.

But what happens to these services when people save money? Suddenly they have no use for services that facilitate movement. With money in savings accounts, these services become redundant.

This is especially true for companies that do not offer an important service. But it also applies to companies that offer services that are badly needed by the public. During the boom, many new startups began to offer some variation of these products and services. The market got somewhat saturated, which was fine in 2021. With cash flow problems in 2022, the money moving isn’t enough to sustain all these companies.

Will Fintech recover?

For the Fintech industry, the reality is that it will always be necessary. People will start using these companies again when the economy improves. Many companies will also find ways to adapt to offer products of value in a recession.

That said, many of the more redundant companies may not get another chance. Investors will be wary of financing enterprises that have no other purpose than to make money.

It remains to be seen whether we will enter a real recession. If we do that, many Fintech companies that are already struggling could find themselves in big trouble.