Which sectors have the highest potential?
It has been a long time Happy year. Fintech has fallen from its peak in 2021, and while 2022 will largely be a reboot of the funding environment, 2023 will be a year of reform for fintech companies.
The great news is that large enterprise and midmarket companies are more concerned about bottom line impact than ever. As revenue growth slows, cost savings and efficiency become critical. Larger companies are more likely to reduce internal innovation efforts and technology investments that are not core to the business.
This opens the door for fintechs that can deliver real improvements to the bottom line by eliminating manual processes and saving their customers money.
First, let’s look at the most likely sectors to challenge: lenders, neobanks and fintechs serving SMBs.
Online lenders
Lending is going to be hit hard. Lenders must manage three major tailwinds in today’s market:
- Increasing delinquency rates and fees.
- A higher cost of capital for the debt you owe.
- Declining consumer demand due to high interest rates.
Focus on how technology solves hard problems, and don’t worry too much about finding the most disruptive in fintech.
Increasing delinquency rates and non-paying customers will be difficult to manage for new fintechs that have been operating for less than five years. These young companies don’t have fully developed models to predict which customers are likely to default.
Managing risk during a downturn can be brutal, and lenders take this very seriously.
Neobanks
Neobanks have transformed the customer experience of traditional banks by offering better digital products and lower costs. Bigger players like Chime, which has raised a large amount of capital, expect consolidation among the smaller neobanks.
The reality is that many neobanks have customers with small average deposit accounts, and deposits are critical to the bank’s business models in the long term. Neobanks also fall victim to the downstream effects of layoffs – if any of their customers are laid off, the banks will see their direct deposit flows decline.
Fintech serving SMBs
Small businesses are more likely to close up shop during a recession. In turn, fintechs that serve SMBs are more likely to lose their SMB customers than larger mid-market and enterprise customers. That’s why you’re seeing businesses like Brax move out of serving SMBs.
what is hot
In the year Fintech opportunities in 2023 will be in “boring” areas such as fraud, compliance, payments operations, tax and infrastructure. CFOs will be more focused on impacting the bottom line than ever before. Fintechs that can demonstrate a measurable improvement in payment authorization and settlement rates, or a reduction in fraud, can withstand failure and thrive.
