The global fintech landscape

Fintech firms, known for reshaping, innovating and challenging traditional financial services are not immune to the market restraints and struggles implemented by economic challenges and wider market cycles. The fintech sector, like others, relies on positive sentiment and a stable economy to grow, and so in a world where both inflation and the cost of raising capital has been high, it’s no surprise that fintechs are under more pressure now to become self-sufficient with a clear view to profitability.

History:

In the early 2000’s, the first ‘fintechs’ emerged in the form of electronic banking and payment processors like Paypal. The sector saw a sharp increase with the emergence of smartphones led by a focus of mobile applications and digital wallets. Fast forward to the present day and financial technology firms play a key part in our day-to-day lives. Our ever-changing needs along with our reliance for faster more efficient methods to complete tasks means there is a technology for everything. To put the growth into context, in 2010 there were 289 fintechs in the UK, this grew to c. 2,500 in 2023[1]. Those figures will continue to increase as both founders and businesses find ways to benefit from the changing banking industry, the rise in digital adoption across the world and our reliance on e-commerce.

The current landscape:

In the current macro-economic environment, where interest rates remain high, political uncertainty proceeds across both the EU and the US, as well as ongoing conflicts, we’ve entered a new era of value creation.

Fintechs have gone from pursing growth and increased revenue generation at all costs, to a challenged funding environment leading to a concentrated focus on profitability to remain competitive. Fintech’s rely heavily on the capital support of Venture Capital (VC) firms in the early-to-mid growth stages. So, in an environment where global fintech funding fell to its lowest level in six years, equating to a 42% drop in 2023 from the prior year[2], value creation has come to the forefront of priorities.  

Targeted cost savings have become a bigger priority today as fintechs look to achieve profitability, whilst also maintaining both customer satisfaction and customer growth. This balancing act has led firms to look at reducing headcount in certain areas of their businesses and reduce the expenditure on the overall marketing costs, which is often one of the top spends in a business looking to grow. However, only certain firms are in the fortunate position in which they can rely on their existing customers and revenue streams as well as their brand reputation. Smaller firms who’ve launched in the last two years often don’t have the brand awareness or the pre-existing client base to reduce marketing costs or headcount. It’s these firms which we speak to who are finding this balancing act challenging – dealing with the lower funding landscape and the need to grow customers and revenue.

From a valuation perspective, the resultant reset in the investment market has significantly hindered fintech valuations. Businesses in 2021 which had achieved valuations of 15 to 20 times their revenue would now be considered in a strong position if their valuations were seven times their current revenue[3]. For our client base, with decreasing valuations and a difficult funding environment, we’ve seen an increase in both acquisitions as well as insolvencies.

However, not all firms have experienced the same challenges. Buy Now Pay Later (BNPL) solutions have thrived in the higher cost of living and inflationary environment. Consumers are looking to spread their purchases via monthly instalments as opposed to a one-off payment in an attempt to ease expenditure. Equally, payments and global remittance fintechs have benefitted from emerging markets which utilise fintech platforms to send and receive money across borders, in a faster and more cost effective way. This has seen a positive impact on revenue growth. This trend is anticipated to continue with Mckinsey expecting fintech revenues in Africa, Asia-Pacific, Latin America and the Middle East to make up 29% of the global fintech revenue by 2028, up from 15% in 2023[4].   

What’s to come?

Whilst the Fintech sector is still facing challenges, there are signs that a more positive environment is around the corner. M&A and investments towards the end of 2023 saw a rise, which has continued into 2024 with some notable high-profile transactions such as Monzo. With inflationary figures coming down and talk of interest rates both in the US and the EU following in a similar direction, the possibility of a more fintech friendly environment provides a more positive outlook.

Political changes

Whilst mentioned earlier in this article that political uncertainty has played it’s part in tough economic conditions, the conclusion of both the US and UK elections will bring an element of certainty which will assist with decision making and forecasting projections into the future.

Finally, 2024 will be an important year for the payments services sector across the EU as regulatory reform takes place. If the regulations are reformed as have been discussed, the proposed changes under the PSD3 would further harmonise the EU payment services framework, primarily easing the cross-border operations of payment and e-money business, which in turn should assist the Fintech sector.

What we do know is, whilst the future is unpredictable, the fintech sector’s ability to adapt and change in a short period of time provides an advantage which has brought the sector to the position it finds itself in today.   

Questions to consider and how we can help

1. Have you ensured you have adequate D&O in place to cover potential liabilities from insolvency issues or consumer duty obligations?
2. Does your insurance policy have mechanisms in place to help with potential liability that comes with raising external investment?
3. Does your firms insurance policies fully insure you for regulatory investigation costs?
4. Does your insurance policy automatically include Extended Reporting Period (ERP) coverage as an option in the event the business enters insolvency?