What to expect in 2023
Using KPMG’s findings as a basis for his comments, Ruddenklau discussed what he believed the fintech investment sphere might look like in 2023. He said: “With interest rates still rising, valuations are going to remain quite tricky for some time. This will likely keep a lot of the biggest potential M&A transactions on the shelf as investors wait to see if prices come down even further.
“That said, M&A activity will likely increase for smaller size deals as corporates and larger fintechs look to buy fintech capabilities at good value.”
The report concluded that H1’2023 would likely remain subdued for fintech investment. While there was a possibility of rising M&As, these were mainly predicted to take place among established, larger organisations. The general trend was that investors would be making safer investments. Despite this, the report highlighted optimism heading into the new year.
Wanting to find out if the industry agreed with this optimism, we reached out to hear from experts.
Regtech will remain strong
Leo Labeis, CEO at REGnosys, a collaborative low-code platform for regulatory reporting, resonated similar thoughts to those that were present in the KPMG report in regards to regtech’s resiliency: “The slump in UK fintech investment will create challenges in the short-term. But this downturn is far from a ‘doom and gloom’ moment for our world-class fintech industry.
“A tightening economic environment weans out business models that do not hold real value, and in the long run will bolster fintech propositions that address defined problems and genuine market need. A clear example of this is the regtech sector, which has emerged as one of the fastest advancing areas of financial technology over the past twelve months and whose growth is sure to continue.
“Regtech solutions are not just a ‘nice to have’. Against a backdrop of growing scrutiny from regulators and G20 regulatory reforms, regtech is playing a central role in helping financial institutions comply with new regulatory standards.
“With spending on regtech set to triple by 2026 alone, this challenging period for fintech will not derail the innovations that are poised to make a game-changing difference to our financial sector.”
A year of consolidation
Marcelo Bentivoglio, chief strategy officer at QI, the financial tools provider, was optimistic about consolidation in 2023, though was wary about high inflation and high interest rates and how they would impact capital for fintechs.
He said: “The high inflation high interest rate macro scenario will be true in 2023. So will be the cost of opportunity for investors which creates higher cost of capital for fintechs. That said, fintechs that depend on debt money to scale, such as lending providers, will have to adjust pricing and be open to rounds with worse terms.
“Alternatively, infrastructure providers can operate better as they don’t depend on cash to grow. Finally, fintechs that also hold financial licenses (and can hold deposits from customers) can benefit from the cash deposits floating revenue.
“It is very likely that we are going to see a consolidation movement in fintech. Entrepreneurs are going to look for opportunities to join forces and have a stronger balance sheet for the years ahead while investors are going to look out for potential investments which present good M&A opportunities as their use of proceeds.”
Correcting a record-breaking year
The drop in investment in 2022 from the offset may seem like a negative thing. However, when compared to a record-breaking year, any drop-off would have appeared negative. Ultimately, fintech is still in a very strong place in the investment world. Both Nikhita Hyett, European managing director, at BlueSnap and Juan Alonso-Villalobos, partner and board member of Startup Wise Guys, both suggested 2022 was a correction for previous years’ overly high valuations.
Booming embedded payments
Hyett said: “It’s easy to get caught up in changes in valuations and layoffs but it’s a cycle that the industry and the global economy are going through right now. It’s a consequence of the buzzy valuations we’ve seen for tech companies with shiny solutions in recent years, so it’s natural we’re now having that correction. What doesn’t change is the chase for the next big growth area.
“We still see huge opportunity in the embedded payments sector, for example, which is expected to reach £2.1 trillion by 2026. That’s a three-fold increase on today. With business’ bottom lines under pressure, monetising payments can not only help firms generate new revenue streams but turn a challenging economic environment into a competitive advantage. It’s this commercial imperative that will drive investor interest in the months ahead as fintech learns to go ‘back to basics’.”
Blockchain’s potential
Meanwhile, Alonso-Villalobos, commented: “A reduction in investments over the past year may be seen as a correction of the previous bubble in the fintech industry. This indeed will lead to a valuation adjustment in early and mid-stage startups, and founders may face challenges in getting the valuations they want as the investment flow becomes more demanding.
“Overall, fintech is still prevalent in 2023 and is expected to remain so, with a focus on payments, back-office standardisation, and using alternative data to aggregate loans and mortgages. Reducing the risk of insurance products and fraud detection, as well as digital identification or KYC management is another area for growth in fintech investment.
“People still see cryptocurrency as risky, but blockchain technology holds potential. There will still be money available for investment, especially in underdeveloped countries where there is a large movement towards financial inclusion and increasing financial knowledge.”