There could be last-minute additions, but the list of advertisers for Super Bowl LVIII does not yet appear to include any fintech companies, in great contrast to Super Bowl LVI (see part one in this series: Fintech’s Wild Ride). The last two years have humbled the fintech sector, and perhaps suggested that spending millions of dollars on television ads is not the best use of capital.
As dramatic as fintech’s rise and fall was, it didn’t represent an unheard-of pattern in tech startups. As with the dot-com boom, a VC-funded expansion occurs, and the goal for startups is to grow at all costs. Then, as a certain level of market penetration is achieved, the focus shifts to profitability — and that can force companies to make some hard, even painful, decisions.
For many fintechs, 2022 was that time of reckoning, a year of falling valuations and layoffs. Yet 2023 was by some measures a good year for fintechs. Shares of crypto exchange Coinbase may never return to their all-time high of $343, but they quintupled in 2023, far outpacing the overall market. Similarly, shares of the BNPL provider Affirm more than quintupled.
In other words, what didn’t kill fintechs may have made them stronger. The COVID pandemic and lockdown created a flood of business that often turned out to be a mixed blessing — a wave of hiring was followed by waves of layoffs. But the fintech sector seems to have learned from many of its mistakes, and seems ready to embrace these following realities.
Consolidation is an imperative. As important as neobanks have become in recent years, there are too many of them in the US, and increasingly they are not distinctive enough to survive in the market. Similarly, the public insurtech companies, Lemonade and Root, have fizzled and seem ripe for takeover by traditional insurance providers or other financial companies. Repeating the pattern established during the dot-com boom and bust, mergers and acquisitions should cull the weakest and reward the strongest.
Private investment may have bottomed out. Global venture capital investment in fintech firms remains well below peaks achieved years ago. Nonetheless, according to CB Insights, the fourth quarter of 2023 saw a slight uptick to $8.5 billion.
The IPO door may reopen. As with the market as a whole, the appetite for fintech IPOs all but disappeared in 2022 and 2023. But that may change soon: Both Klarna and Stripe appear likely to go public in coming months, and that could prompt other fintechs to come into the game. “There’s a lot of money on the sidelines,” says Chris Sugden, managing partner at Edison Partners. “Conditions are good once people believe the landing has been soft.”
BNPL has figured it out. Through the beginning of 2023, there was paradox around the companies — Affirm, Klarna, Afterpay — that built their empires on BNPL: while the installment payment system continued to balloon in popularity, it wasn’t easy to make a profit on the business. That seems to be changing; Klarna reported a small profit in the third quarter of last year, and while Affirm still loses money has introduced new business lines that put it on a stronger basis.
BaaS will remain a powerhouse. Fintechs offering banking-as-a-service remain one of the most powerful ways for small and mid-sized banks to increase their deposits. An S&P Global Market Intelligence research report published in September, for example, demonstrated that a Tennessee-based bank that partnered with a BaaS firm saw “non-interest-bearing deposits jump from $19.9 million in the second quarter of 2022 to $113.4 million in the third quarter of that year.”
Stablecoins are a force. The widespread use of stablecoins has, at times, reached a level that alarms federal regulators, and has prompted rare bipartisan legislation (not yet passed) about how stablecoins should be regulated. The meltdown of the Terra stablecoin system in 2022 was particularly disturbing.
Cross-border payments will grow. There remains in the US an under-tapped demand for fast, cheap ways to send and receive money from other countries. As commerce becomes more global and other countries develop effective fintech apps for cross-border payments, there is increased pressure for both fintechs and traditional financial institutions to keep pace. Some companies based outside the US, such as the UK-based Wise (formerly TransferWise) have made inroads into the US market, but without a clear leader, there will be increased competition for the foreseeable future — and whoever wins will reap tremendous benefits.
Alternative investments will grow and be absorbed. Platforms, like Republic and Yieldstreet, that offer low-cost investments into non-traditional investments (fine art, crypto, real estate) will continue to grow their appeal. As that happens, these platforms will merge with more traditional outlets. “People will want to have brokerage accounts, 401(k) and alt investments all in one place