By Anna Oleksiuk, Fintech Practice Leader, Intellias
Having already experienced three major crises in the last two decades, the financial industry needs to invest in technology to find new ways to navigate this latest crisis. Increasing costs and political unrest – combined with economic and funding challenges – will make 2023 no normal year for financial businesses. Fintechs and traditional financial institutions will only weather the recession with a robust plan for innovation to address this new “sobering” market.
Business confidence has declined significantly, consumer spending is down, and economic growth projections are poor, with investor cash drying up. In Q3 2022, fintechs raised just $13.3 billion globally, down by 64% from an all-time high in Q4 2021. According to the British Chambers of Commerce in October 2022, 39% of businesses across the UK believe their profitability will reduce over the next 12 months.
The market reality for fintechs
While traditional financial institutions (FIs) are marginally better off, being less reliant on external cash injections, fintechs are in the danger zone. Investment isn’t what it used to be since some fintech companies took a tumbling fall. Fintech investors want to be guaranteed their investments make good judgements.
All things considered, it’s a fair prediction that financial businesses with the best product, positioning, and financial diligence will be a beacon for capital and market share – while those that don’t make changes will struggle to compete.
A good number of private reserves will be used for immediate survival versus the innovation and transformation required for long-term strategic growth. The answer to navigating all this growth-survival conflict lies in good corporate governance.
Three fundamentals for fintechs to navigate this recession
By focusing on three fundamentals, fintechs can ideally position themselves for success:
- An agile business model
Embracing change will be vital this year. The emerging world of open finance offers many new opportunities, although banks and fintechs may need to reassess their current business model to be able to transform successfully.
While market leaders have managed to successfully build out a platform, embrace open banking, and scale through collaboration with partners, many FIs remain pegged down by rigid legacy architecture.
Fintechs don’t have to rip and replace for a backend systems transformation in finance. In fact, most choose to progressively decouple non-critical systems from the core and design new offerings as microservices. A lot of these new products are “borrowed” from other industry players via APIs, and are not built in-house.
The way forward is to adopt cooperation over collaboration. This means that fintechs will have to find high-potential product ideas, instead of producing just features. And banks will have to map the current shortcomings and determine the optimal technology for evolving their product portfolio. This evolution is vital for ensuring smooth operations in 2023 and beyond.
- Strong business processes
Although business size isn’t everything, it appears that profitability discipline is. Amazon, often touted as the growth-at-all-costs kind of company, only survived by checking its balance sheet and selling over $672 million in convertible bonds to build a stronger cash reserve merely months before the 2000 stock market crash hit.
While many unicorn fintechs have shown strong surface-level growth results, such as a high number of user acquisitions in new markets, some have not yet broken even or only broke even for a few months in 2020 before plunging – with exceptions such as Starling Bank that announced a full year of profit in 2022.
With consumer spending dwindling, digital banks that are mostly dependent on transactional revenue will feel further pressure. To avoid getting backed up in a tight corner, fintechs must embrace the somewhat remedial, but effective profitability discipline.
Strategies like launching new crypto or investing more in aggressive marketing for customer acquisition are all well and good – but might bust the budget in 2023. It’s sensible to focus on things that can help secure the investor trust needed to build cutting-edge things and do away with processes that can tank the business. Real efficiency just isn’t achievable without financial diligence and strong operating processes.
- A culture of innovation
Fintechs can sometimes rush in and churn out multiple ideas, implementing them without properly assessing their impacts on user base growth or profitability. They are best to build a better process for prioritising and validating new customer offerings and to ensure they test an idea first. It is important to be willing and capable of creating MVPs while also building an open team culture where any ideas or feedback can freely travel within the organisation.
Thinking about the business roadmap, not just the product roadmap, is also important. This means thinking about the main KPIs and remembering that copying the competition with new product features or launching new offerings isn’t always the best course of action.
Innovation is important, but financial product development is expensive and takes time. Therefore, it’s always better to start with an MVP product or service which can take three to six months to get to market. Customer feedback is vital to refine the application as is the evaluation of clear metrics to check the new development is getting the required results.
Strategising to thrive during the downturn
In this unpredictable financial landscape, those businesses that are prepared to embrace change will be the winners – the fintechs that can evaluate, economise, and evolve to create new opportunities. And technology will play an instrumental role in this.
Cutting costs is good, but it’s important to do it strategically. This means fintechs must try to find the optimal “save-growth” pairings, rather than simply slashing costs. For instance, a fintech can reduce customer acquisition costs and grow its user base by investing in new digital sales channels or improving existing onboarding flows.
Ultimately, it is all about making the right choices and priorities for improving areas with the highest ROI potential. 2023 will be a tough year, but it’s full of opportunities for businesses that are ready to pull off a tough act, knowing where to play their cards right, and when to fold.