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It’s safe to say that little did we expect, at the beginning of 2022, that the second half of the year would turn out to be quite rocky, and perhaps a turning point for the tech industry in general, and fintech more particularly.
For over a decade, a low interest rate environment around the world has fueled investment with traditional venture capitalists (VCs) beginning to compete with the arrival of hedge funds. as well as sovereign and family offices in the space. A fear of missing out (FOMO) was felt by everyone, everywhere.
Investments made in fintech startups went in overdrive during the COVID-19 pandemic, due to the exponentially accelerated digital adoption- indeed, what should have taken years to change consumer habits only took months in this period. At the end of 2021, fintech companies raised more than US$130 billion, and more than 100 new unicorns were born. At the end of Q3 2022, fintech investment went down by 60% year-on-year, and this downtrend is set to continue into 2023. That said, there will still be winners coming out of this “correction.”
2022 offered us a glimpse of what high inflation looks like, which is currently at a 40-year-high in the US and Europe, pushing central banks around the world to react aggressively, rising benchmark rates at record speed and levels, leading to high cost of funds, and to a more than likely recession in 2023.
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Keeping these factors in mind, here are my predictions for the fintech industry in 2023, and more particularly for the cross-border remittance and financial inclusion sectors:
1. Continued down-rounds for fintech startups This will be especially true for startups that have raised at very high valuations in 2021 and 2022, and with a shortened runway. Many fintech companies -particularly those in B2C and dealing with retail borrowers- will be forced to shut down, or sell themselves. Others will accept funding at steep valuation haircuts, permitting them to extend their runways. Not all is doom and gloom though, with pre-seed and seed startups, as well as startups on a path to profitability, being in a better position to fund-raise (especially repeat fintech founders), and attract top quality talent from later-stage startups.
2. More than ever, great talent will be up for grabs And this is especially true for pre-seed and seed-stage startups and incumbents. Later-stage startups that have undergone lay-offs rounds or speculated to have some coming soon have lost the trust and confidence of their employees. All their best employees will be jumping ship because their equity is under water. For entrepreneurs in this space, this means that you need to keep an eye out, and make sure you hire the best there is out there. Their experience will be invaluable to you.
3. Environmental, social, and governance (ESG) frameworks and financial inclusion will be in the spotlight Following the strong adoption of fintech and primarily digital wallets in the past couple of years (which was accelerated by the COVID-19 pandemic), financial inclusion has experienced some strong tailwinds, especially in the MENA region. With more than 100 million people in the MENA region unbanked, and more and more initiatives from regional central banks and the likes of United Nations Development Programme, World Bank, International Finance Corporation, and others being rolled out to adopt fintech and promoting partnerships with incumbent financial services players, fintech startups tackling ESG and financial inclusion will fare well.
4. Strong acquisition or partnership activity between incumbent players and fintech companies With rising interest rates, banks are replenishing their war chests, and they will most certainly be on an acquisition spree, given slashed valuations of fintech startups out there. They will either be purchasing fintechs outright to accelerate their own development, or picking off their talent as startup workers will return to banks and asset managers. I would also expect to see more partnerships happening, with the likes of JP Morgan having been the most active in the fintech space in 2022.
5. Changes in the cross-border remittance space Last but not least, as a co-founder of Purpl, a startup that operates in the cross-border remittance space, I expect global remittance levels to come down from their highs, after a 9% increase in 2021, and a 5% increase in 2022 to $626 billion, with a possible contraction of 0-3%. This will mostly be due to foreign workers in the US, Europe, and the MENA losing their jobs due to cost-cutting, or, in best cases, be saving less due to higher costs of living and lower purchasing power, ultimately leading to less money for them to send back back as remittances to their families. That being said, this contraction will be an opportunity for fintech companies in the space to focus on their product and service offerings, as well as user experience, to capture a bigger market share of their addressable market.
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