For the Fintech industry, it’s a New Year accompanied by concerns from 2022.

The record-high times in 2021 of investment, transaction volume, release of new products & features, market expansion — have disappeared. Last year introduced a bleak industry outlook. 2023 is expected to come with a reckoning.

Mixed signals from the economy between contraction and improvement with unemployment, consumer spend, and other key indicators. Concerns with rising inflation causing interest rates to increase, directly impacting sectors (such as lending) and slowing critical activity (such as home purchases). Investors, founders, startups, enterprises are all uneasy.

What does this mean for fintech at the start of 2023? More of what we saw in the last half of 2022 — caution ahead.

Minimal investments as investors change priorities from growth to profitability, which cascades to companies going lean with less spend.

Hiring paused, with many fintechs (public & private) announcing layoffs — Amazon, Plaid, Twitter, Coinbase, Meta are a few of the well-known companies with cutbacks last year.

Additionally, new projects, products, and expansion opportunities are delayed as firms focus on core revenue streams. Roadmap discussions are less ambitious than in previous years — lack of emphasis with new developments and an increased focus to reinforce what’s working.

Consolidation is a term that becomes common in 2023. Startups in saturated markets surviving on their last round are struggling to gain new investment — the choice comes down to being acquired or shutting down. Without a buyer, companies are announcing business closure (Wyre failed to be acquired by Bolt last Sept. and disclosed operations will cease at the end of Jan.). The struggle comes down to companies navigating the industry turbulence, which will vary based on sector.

What’s the Play, by Fintech Sector

Payments (P2P, B2B, Invoicing): As the first (and most established sector), the payments space is the most competitive and transaction-focused. End-users are extremely price-sensitive, which pushes platforms in a race to 0 with fees. Lowest cost is the main decision factor — partnerships are won and loss off of basis points (or bps), the % of a transaction that companies pay to be able to accept a customer’s payment.

Traditional payments (Peer-to-Peer transfers, ACH, wires, card processing) will continue down this path in 2023 of lowering costs to attract new clients. Business-to-business (B2B) and cross-border transacting are the areas most open for startups and less-established players to win market share — they’re also the most complex, based on higher dollar amounts and increased risk for money laundering. The common thread for both is increasing speed + convenience, which no one company has completely figured out. Invoicing solutions for businesses (of all sizes) are the best play for fintechs this year.

Digital-only (Neobank, Challenger Bank) for Individuals: Major markets (such as the US & UK) are packed to the brim with neobanks and challenger banks fighting for primary account relationships and card spend. In early 2022, many of these fintechs struggled to maintain user activity on their platform — interchange revenue (derived when a user swipes their debit or credit card for a purchase, paid by merchants) started to decrease. Without this core revenue driver, single-product neobanks started burning through cash at a higher rate and were forced to cut down on staff (e.g. Varo in July) or shut down prematurely. There was also a declining trend in digital account opening (estimated at 45% last year).

2023 isn’t an optimal time to launch a new consumer neobank, unless you’re in an emerging market targeting unbanked individuals. Latin America and Southeast Asia are two non-US regions in which the need for digital banking AND high adoption of mobile is attracting founders. If you’re still bullish on launching in an established market (like the US), targeting a niche audience (e.g. immigrants from LATAM, or international software engineers working remotely for US companies) provides a small opening.

Digital-only (Neobank, Challenger Bank) for Businesses: Banking business entities continues to be an open field, even in established regions around the world. Traditional banks tend to deliver a vanilla experience, often mirroring an offering for consumers. A few fintech players (such as Mercury in the US) are leading the way, but the opportunity is still wide open when segmenting by size of business, business industry, and transaction needs.

The play in 2023 is for fintech platforms that offer expense management, accounting, and corporate cards to evolve into business neobanks. The data, relationship, and activity is already there — only thing missing is the primary relationship (which comes with deposits, and interest revenue on those balances). Startups (like Ramp) stood out among peers in 2022 due to increased growth and market share — solid candidates for this sector.

Crypto: Unfortunately for this sector, more ‘hard times’ ahead in 2023. The fallout from FTX (last November) caught everyone off-guard and brought ripple effects throughout the finance world. BlockFi filed for bankruptcy in the same month (following Celsius, who left earlier in the year).

The offering of higher returns from DeFi (Decentralized Finance) platforms went away in early 2022 as regulators became vocal with guidance and enforcement letters. Stablecoins and limited BTC/ETH trading are what’s left for mass retail customers. The open question: “what platform should you trust?”

For fintech startups, another critical below came with Wyre’s announcement of shut down — this vendor offered platforms a fast and low-cost path for embedded crypto services.

Unless crypto valuations bounce back to 2021 levels (BTC above $50K), there’s no real play in this sector due to uncertainty (risk and market conditions). A small opening may come from fiat-crypto hybrid platforms that issue spend cards for everyday purchases (off of stablecoins), but compliance expertise and tight controls would need to be in place from the start.

Lending (Advances, Credit Cards, Loans) for Individuals: With interest rates rising, cost of capital (for unsecured credit cards and loans) also increases for non-bank lending platforms. The net profit margin (interest revenue minus cost of capital) is starts to drop. To top it off, rising economic hardship correlates to increased default rates as consumers struggle to repay debt. Poor conditions ahead to launch or maintain an unsecured lending program.

Secured & credit builder cards/loans (with limits backed by user deposits) eliminate concerns with cost of capital, and can boost or repair credit profiles of consumers. It’s an easier a way to enter the lending sector and the best play in 2023 — founders and product teams should make sure they stay up-to-date with state & federal regulation though (especially in charging fees for credit products).

Investments, Trading for Retail users: From stocks, bonds, startup financing, real estate, to solar energy and collectibles — purchasing ownership shares in assets became easier and more affordable for mass market consumers over the last 3 years (via fintech apps). With the stock market down nearly 20% in 2022, fearful investors are transitioning funds away from alternative and long-term investments to conservative, short-term bets. Bank deposit rates slowly increasing is also pulling investments balances towards FDIC-insured savings accounts at traditional financial institutions.

Besides multifamily real estate rental properties, its unclear which asset classes would outperform the stock market this year. The economic uncertainty has alternative investment platforms scaling back expansion more than other sectors. Unless, there’s a unique value proposition or asset class to offer, rallying consumers as new investors will be too challenging in 2023.

Breakthroughs are still possible

Despite the harsh conditions (especially with funding), platforms that are new to market or established can still make a breakthrough with growth. The best tool in a tough environment full of competition: differentiation.

What ‘special sauce’ does one fintech have over another (in the same space)? Offering a similar financial product in a similar fashion as others does not work. Let’s all stop trying to be the next Cash App.

Combine strong responses to “what painpoint(s) does my target user have?” AND “why would this user utilize my platform for this problem?” Easier said than done, but the builders & product teams with the most clarity here have the best chance in launching a sustainable program. Marketing, community-building, and nice-to-have features can build off this foundation.

Cheers to the industry market makers strategizing, those coming out of stealth, and new product champions during 2023!

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