It’s a funny thing when eras shift. You don’t really notice it until it has passed. Hemlines that once dusted the floor are now causing a run on opaque tights. Electric and poppy tunes move to folksy rhythms and acoustic guitars. Fintechs that were rebellious, innovative and young get priced out of their warehouse loft spaces in the cheap end of town and take up proper jobs with a regular paycheque and a hybrid working environment.
When did the shift start, what events become its symbolic start and end, and when do eras become nostalgic?
In 2007, Apple released the iPhone, the first actual smartphone, which pretty much killed the Blackberry. Bitcoin launched in 2009, which introduced the world to decentralised finance and the ensuing culture associated with it. The UK’s Financial Conduct Authority, founded in 2013, loosened the licensing requirements needed to offer (and I quote an actual FCA employee here) “products that are in the banking bucket”.
A lot has changed since those innocent times. Digital acceleration, so lauded during the Covid-19 pandemic, has plateaued. Interest rates and inflation are high and previous fintech darlings have struggled, with some having shut down due to a dry funding environment that exposed weak business models.
However, these are trends, drivers, shifts in environments that impact the state of fintech — or how finance and banks use technology to innovate products, business models and services — today. I say the first wave of modern fintech ended almost one year ago when the industry turned on itself and destroyed Silicon Valley Bank with a run that saw its US business sold to First Citizens Bank and its UK business to HSBC. The HSBC acquisition of the UK arm of SVB was famous for its weekend deal and £1 price tag.
As sad and unnecessary as the demise of SVB was, it did shine a light on a wider Silicon Valley-style culture that valued hyper growth over sustainability, and exits over longevity. Fintech companies were not immune to this culture. However, this new environment may favour the business models of fintech companies — which run the gamut of consumer to enterprise-wide offerings — in the long run.
So where are we in this “new era” of fintech?
Global fintech funding was down 50 per cent year on year to $39.2bn in 2023, while deal volume slipped 38 per cent to 3801 — the lowest levels since 2017. Q4 2023 saw the fewest fintech deals in seven years, according to the State of Fintech 2023 Report from CB Insights.
The report goes on to say that eight fintech unicorns were born in Q4 2023 — a six-quarter high, but below 2021’s quarterly average. Asia contributed half of the new unicorns — three of which are based in Gulf States. This was the first time since 2019 that more fintech unicorns were born in Asia than in the US in a given quarter.
The report also saw investment to banking start-ups evaporate, with funding falling 72 per cent in 2023 — the biggest YoY decrease across fintech sectors. Payments start-ups, meanwhile, saw funding decline just 30 per cent YoY — the least of any fintech sector.
In the UK, KPMG’s Pulse of Fintech, a biannual report on fintech investment trends, saw fintech investment down 34 per cent in 2023, while retaining a lead in Europe. KPMG also found that total fintech investment in the Emea region dropped to $24.5bn in 2023, down from $49.6bn in 2022 and the lowest level of fintech funding in seven years.
British fintech companies attracted more funding than those in France, Germany, China, India, Brazil, and Canada combined, and the UK saw the largest deal in Europe.
Peel Hunt analyst Gautam Pillai believes the industry is at the beginning of a “fintech super cycle”. Pillai says over the past few years the firm views “the fintech sector being at the same moment in time as internet companies post the dot-com crash” but believes “the internet moment for fintech is yet to come”.
The reason for the delay is because many fintech companies are still dealing with higher interest rates, inflation, and other macro factors. Once these companies adapt to a “new normal” he says, the sector should see acceleration in growth and re-valuations.
Pillai says he is “convinced the sector stands at the brink of some of the most interesting breakthroughs”, such as open banking coming into mainstream use, generative AI bringing a myriad of use cases, and tech enablers like Swift moving to the ISO 20022 MX message format.
Next thing you know, someone will plan a “Party like it’s fintech 2015” event equipped with ping pong tables, beer fridges and motivational quotes in glowing pink neon on every wall. Pass the pitch decks and pour me a martini.
Liz is deputy editor of The Banker. You can connect with Liz on LinkedIn, or follow her on Bluesky.
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