In my first article of a new series on the FinTech industry, I explore how, in 2023, the FinTech investment market has become more selective, with venture capitalists investing in FinTechs that adhere to strict financial and performance standards in response
to the recent economic developments.
This is an indication of sharpened focus rather than a reflection of the industry’s slowing down growth. Read more below.
The FinTech investment arena has become increasingly selective in 2023 — with venture capitalists responding to recent economic factors by investing in FinTechs that meet stringent fiscal and performance criteria.
This isn’t a sign of declining growth in the industry but rather an indicator of refined focus. Long-term value still exists in FinTech investment; financial services remains one of the most profitable sectors of global economy. With over a $2.3 trillion
profit pool to be converted to FinTech, the prize is massive. Those businesses illustrating detailed plans on their paths to profitability and displaying a continued connection to customers stand to benefit from funding at stake, positioning them well for
industry disruption.
Valuation in the FinTech space has shifted
Today’s investment context can be traced back to before 2021 when companies were gearing for growth at all costs. This created an environment in which FinTechs were rewarded with both funding and high valuations.
However, in 2022, the trend shifted. Challenging macroeconomic conditions drove higher inflation and interest rates — which led to a correction in valuations. Investors refined their focus on unit economics, profitability and mature business management.
In 2023, this outlook matured into a measured investment climate where funders are operating with higher due diligence and rewarding a disciplined approach toward spending. In Q1 2023 alone, approximately 1,000 FinTechs received funding.
The market still holds rich potential
The last 12 months have seen a necessary short-term correction in an otherwise positive growth story. There’s still substantial money waiting to be invested with dry powder
as high as $1.3 trillion for private equity and $580 billion for venture capital globally (18%+ of all VC funding went into FinTechs in 2022). While investors and founders may be conservative in the short term, they remain cautiously optimistic about the
future.
The potential within financial services is clear: the World Bank Financial Inclusion Report noted a large percentage of adults remain unbanked (27%) or underbanked (50%) globally. This is good news for FinTechs
setting out to disrupt the status quo.
Global financial services are poised to reach $22T by 2030, growing at 6% CAGR, with annual FinTech revenues expected to grow sixfold to reach $1.5T by 2030 (22%+ CAGR). Banking- related FinTechs are expected to represent a
quarter of all banking valuations by 2030. Payments ($520B) will remain the largest FinTech segment by revenue in 2030 followed by lending ($400B).
Themes and priorities for FinTechs
TransUnion has noted several trends and priorities within the sector. Open banking is seen as a new way of gathering consented information and is moving into broader adoption the mainstream slowly but steadily. Plus, there’s continued demand for buy now,
pay later (BNPL) solutions, although these are falling under increased regulatory scrutiny. Building a sustainable and profitable lending business would mean neo-banks and lending platforms, particularly in mature markets, will adopt lending on their own balance
sheets or opt for co-lending.
Connecting with consumers in new, efficient ways will remain a priority. FinTechs can improve user experiences by introducing friction-right onboarding and verification processes, and finetuning their focus on cross-selling and upselling — with embedded
finance positioned as a tool to empower customers and introduce ease into their experiences.
Fraud and cybersecurity continue to increase within the current, challenging macroeconomic climate, making fraud prevention a central strategic priority for FinTechs seeking to build and maintain a competitive edge in a rapidly evolving market.
How FinTech CEOs can respond to the current macroeconomic climate and trends
To strengthen fundamentals and drive profitable growth through this current economic cycle, FinTech CEOs must prioritize fortifying their approaches to data.
Successful FinTechs will use data more effectively to monitor their existing customer bases, cross-sell to existing customers, reduce delinquencies and control costs — while forging a path to profitability.
At TransUnion, we focus on building a sustainable data foundation with our clients. We’ve seen how the right data strategy and tools result in responsible growth, aided by informed decisions that are based on actionable insights and improved workflows. Our
clients use the data at their disposal to actionably assess their customers’ risks and increase risk measurement effectiveness, thereby building stronger relationships.
This is a critical moment for FinTechs to focus on their foundations, clarify their data and position themselves for growth. With these fundamentals in place, huge funding and market potential is possible.
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