Yes, this is an overly pessimistic review of 2022. While we are going through a rough patch, downturns encourage innovation, pushing sub-sectors of fintech to the fore and we do have cause for optimism in 2023.
Here are some of the key trends we’ll be keeping an eye on over the next 12 months:
Investors to remain picky, fintech to remain sticky
According to Dealroom, fintech investment fell 32% to $21.5bn in 2022, its lowest in five years.
A combination of geopolitical uncertainty, turbulent markets, high inflation and rising interest rates all led to subdued levels of investment. Other factors including a decline in public market valuations and the poor performance of various IPO listings dampened optimism from investors.
Venture capitalists became increasingly sceptical about the appetite for risk associated with unprofitable growth, and about customer acquisition costs and monetisation, forcing fintechs to tighten their belts.
If the easy money is no longer there for fintech, the good tech which meets genuine use cases is going to stick and there will be an almighty clear out of the junk.
Firms will need to work harder and smarter with existing cash flows and teams from the top to the bottom of the organisation.
This downturn is going to be both a shake-out and an opportunity for great fintech firms to show their real value.
AI moves increasingly into mainstream
ChatGPT, the artificial intelligence chatbot which can provide detailed responses and articulate answers to also any topic or question, has caused quite a stir online.
Created by OpenAI, which was co-founded by Sam Altman, Elon Musk and others, the software is still in its prototype stage but has been made available to the general public for free.
The overall response has been mixed, and the programme is so capable of answering questions like a person that it’s left many experts wondering what the implications could be. Speculation includes the death of Google’s search business, a wave of “AIgiarism” – or AI-assisted plagiarism, mass customer service layoffs and more. Its potential is huge and there’s already talk that the firm is set to raise capital at an almost $30bn valuation [paywall].
AI technology is already used widely fintech to automate repetitive processes, such as data entry and background analysis and improve decision making by simplifying analytics. ChatGPT presents an opportunity to take this progress further, improving the accuracy and efficiency in dealing with queries, enhancing customer experience and building loyalty.
Crypto regulation is coming
2022 was an eventful year for the crypto industry – the stablecoin meltdown in May, major hiring freezes and layoffs from the likes of Coinbase and Gemini and the collapse of FTX all impacted crypto prices, resulting in the crypto winter.
Despite the turbulence, Charley Cooper, Managing Director at R3 believes that currently, the market is too small to have any real impact to mainstream finance. He does, however, believe, “if the size and scope of the industry grows over the next few years, then a crash like the one we have seen this year could pose a real threat to widespread financial stability.”
But while it may not currently impact mainstream finance, the crypto winter has taken a toll on many retail investors. Around three-quarters of Bitcoin investors lost money in 2022 alone and many other coins suffered price drops, leading to calls for a regulatory crackdown to protect investors.
It is hard to predict where crypto will go from here. However, it is likely that regulation across the market will accelerate to establish more stringent consumer safeguards as regulators seek to prevent such an enormous fallout from happening again.
Blockchain has huge efficiency benefits and can bring greater speed and cost-savings to financial markets. There are many players within this space who are genuine innovators and wish to progress the industry through trust and transparency.
Against a backdrop of heightened scrutiny, it is vital that digital finance companies have clearly defined services and offerings – and the ability to communicate this to their target market – if they are to fulfil this potential.
Tech job losses could lead to innovation boom
2022 was the year of tech layoffs – over 235,000 people were laid off within the tech and fintech sector according to job loss tracker, TrueUp.
The biggest spike was in November, according to a report from Challenger, Gray and Christmas, during which there were almost 53,000 cuts. Some firms have blamed the effects of the Covid-19 pandemic while others, such as Twitter, pointed to overhiring during periods of rapid growth.
As a result, there is a lot of talent on the street, and this could manifest itself in a number of ways.
Similar to what happened after the dotcom bust, we could see a startup boom. Those laid off with healthy financial packages could choose to set up their own firms and even compete with their former employers, leading to increased competition and disruption.
We could also see increased innovation at bigger, more traditional financial institutions. People that lost their jobs may look for more security and these types of firms can offer just that. There may be an adaptive period however as many will be used to the ‘move fast and break things’ mantra which isn’t quite how the more traditional firms do things.
Lastly, it could be good news for startups who struggle to match the packages at big tech firms and so can’t attract more experienced hires. There are already reports of startups having better access to talent and many of those that are laid off could well seek to go back to the good old days of being the disruptor challenging the incumbents.
Crackdown on greenwashing
The term greenwashing is not new. It’s been around since the 1980’s and, according to KPMG, it means dishonest practices used by businesses to represent themselves as more sustainable either by giving a false impression or providing misleading information as to the sustainability of a product/service.
The FCA recognises that over the last few years, the financial services sector has ‘seen a dramatic increase in ESG and sustainable investments which has also led to increasing concerns about firms confusing or even misleading consumers about the nature of some of these investments.’
Regulators across the globe are now moving to tackle the issue of greenwashing, especially around the naming of funds which has been described as a “powerful marketing tool” for asset managers.
In November 2022, the European Securities and Markets Authority (ESMA) announced new rules for the naming of ESG-related funds to “address any misuse” of the Sustainable Finance Disclosure Regulation (SFDR).
A month earlier, the Financial Conduct Authority (FCA) proposed a raft of new measures including sustainable investment labels and consumer-facing disclosures to boost consumer trust.
While the crackdown is welcome, greenwashing has brought increasing scrutiny on ESG efforts, making it more important than ever that firms keep their green credentials simple, factual and authentic. Otherwise, they risk the greenwashing treatment, which can lead to negative backlash, reduced trust in their brand and, in extreme cases, regulatory action.
Here’s to 2023
As with any year in fintech, it’s impossible to say what will happen next. What is clear, is that technology must address defined problems and use cases, genuine market need and have a realistic path to delivery to thrive.
While some firms will suffer in the next 12 months, those with people who understand financial markets and the regulatory environment and work closely with them from the start to ensure their tech meets the highest benchmarks of resilience and operational efficiency will prosper.
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