The fintech wave began in the 2000s, fuelled by new technologies – cloud computing and the smartphone, in particular – and traditional finance’s failing, accelerated by the financial crisis in 2008.
But, as we start the slide into a global recession, fintech is facing its own mortal challenge: dealing with a scarcity of investors in a time when they most need investment to scale.
For most of the past 15 years, start-ups have found easy access to capital and investment from venture capital firms and private equity investors. But the easy money has dried up this year, and most start-ups are struggling with both their business model and future.
For example, Stripe, which helps merchants to take payments online, was valued at $95bn a year ago; today, almost $20bn has been wiped off that valuation. Such a high valuation is still amazing for a 12-year-old company, and demonstrates that all firms have seen a strip – rather than a stripe – taken off them.
Even more surprising is what’s happened with some other agenda-setting innovators, such as Klarna. The Swedish company was one of the first fintechs to fuel the explosion in the buy now, pay later market. A year ago, the company had a valuation of almost $50bn; however, this year it has plummeted to $6.7bn.
Conclusion: the markets are hard.
Changing climate
Most of these start-up firms – approximately 25,000 fintechs globally – have never experienced a recession before. They have never been through a market downturn, as the only way has been up for the past 12 years. But what will happen in a recessionary economic phase?
Well, unsurprisingly, we’ve already seen bloodletting. More than 7000 employees have been laid off this year in the fintech industry and that number is expected to grow. Additionally, many firms will disappear because they lack the runway to continue funding, while others will be acquired to stay afloat.
This creates an interesting juncture.
On one hand, many fantastic ideas in the start-up community are available to banks at bargain-basement prices. On the other, the fintech firms that remain buoyant will be in pole position to expand their market footprint.
In relation to the first point, incumbent banks have spent the past decade watching the rise of innovators and wondering how to respond. While they may have been wary of buying fintechs in the past, there are many ideas out there that can improve banking which incumbent institutions could appropriate. Therefore, it would make sense for a bank to buy some of the smaller firms who are struggling, if for no other reason than to learn from and internalise their ideas.
Equally, any bank that makes a move on a large fintech innovator, such as Klarna, would make a mark on the future of the industry. Having said that, an acquisition is not an easy thing. There’s often a culture clash, a departure lounge of the most visionary and talented staff, and multiple issue as to how to get the acquisition to work with the older firm.
Why buy?
These arguments could apply to the second point, too. A fintech firm could expand their offering by acquiring a competitor or adjacent ability. Stripe could acquire Klarna. The question is: why would such an acquisition occur? In a market where funding is squeezed, companies are struggling and valuations have dived, why would you buy a competitor or additional talent?
The motivation is obvious: because they are cheap.
The next few years will see substantial consolidation in the fintech start-up community through mergers and acquisitions. I predict that some big names will be acquired by banks, as well as other start-ups and competitors.
This makes the current environment even more fascinating. After a decade of easy money, easy growth and easy business, the world has hardened. I don’t predict all of these firms falling over a cliff, but I expect that the predators will find some easy prey.
