vcs discuss the state and future of the fintech industry

The decade that followed the financial crisis of 2007-2008 saw the financial technology space grow at an unprecedented pace. This growth came on the back of the introduction of highly disruptive business models such as zero-commission trading within the brokerage industry, zero-fee bank accounts, and free and borderless digital payments solutions.

Then came the pandemic and conditions in the space improved when it came to finding funding for venturing into bolder value propositions. Startups successfully found investors who were willing to take the risk of proving that there were new ways to do things in an industry dominated by outdated practices.

Also read: 3 Fintech Predictions for 2023 – Best Sectors for Growth Opportunities This Year

However, last year proved that some of those projects were just too idealistic as their revenue-generation capacity was just not good enough to turn a profit or ensure the survival of the firm at a point when funding is drying up.

VCs Discuss the State and Future of the Fintech Industry

During a recent panel led by Reed Albergotti, the tech editor of news platform Semafor, VCs from various firms in the United States shared their thoughts in regard to the future of this industry and what challenges it is facing at the moment.

“A lot of these companies have to like fix their business models and a lot of the ones that went public probably shouldn’t have”, Jillian Williams from Cowboy Ventures asserted.

“Certain sectors of financial services are going to have a brutal year ahead”, Williams added. She pointed to fintechs in the lending space as some of the most fragile in the current macroeconomic environment due to three reasons.

The actions taken by the Federal Reserve to keep inflation at bay, including hiking its benchmark interest rate from 0.25% to 4.5%, have resulted in higher risk premiums imposed on fintech startups.

This has reduced their equity valuations and has made it more difficult for them to raise money via debt as their business models can’t support elevated interest expenses.

Is this new paradigm a sign that the fintech industry is inherently broken? Venture capitalists surveyed by TechCrunch don’t appear to believe so but they do acknowledge that changes need to be made for startups in this space to thrive.

“… consumers lost their jobs, [rising] interest rates, and the cost of capital is higher”. This is a situation that other experts have also identified and it is considered one of the trends that will dominate the space this year.

Also read: Top Tech Stocks to Invest in January 2023

Even when the economy was doing good, these companies did not have much to show for on the subject of profitability. The scale they reached back then, in the majority of cases, was not enough to ensure the feasibility of their business models and it is unlikely that they will see brighter days in these macroeconomic conditions, meaning that they could struggle to make ends meet on the face of lower consumer demand.

For Victoria Treyger, a general partner at VC firm Felicis Ventures, many of the “casualties” in the fintech space will be young companies that lack the experience and resources to navigate the current downturn.

Fintechs That Help Institutions Improve their Bottom Lines Could be Favored

Despite this relatively gloomy outlook, the three women who had their brains picked by Albergotti agreed that there were still opportunities for startups that helped legacy institutions ramp up their bottom line.

In times like these, Chief Executive Officers prioritize their firm’s profitability over growth. Hence, companies that come up with solutions to issues that eat up a chunk of a bank’s revenues may have a foot in the door already as their ideas will likely be heard.

This trend will be fueled by the fact that most institutions will cut their research and development expenses and will turn to third parties to use existing solutions to solve their problems.

“…in a downturn is CEOs and CFOs [priority to] cut back on the areas that are not critical”, Treyger commented. She added: “[I] think what’s going to happen, is that all of these innovation arms are going to be cut”.

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