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  1. Analysis
17 May, 2022

Why the fintech industry should be worried

By Eric Johansson

Fintechs have reason to be worried. There’s certainly been no shortage of bad news hitting the sector recently. Headlines about investment cooldowns, mass layoffs and plummeting stock valuations have slammed the entrepreneurs of this space in the face for months.

Then, of course, there’s the very public implosion of Fast to consider. While the startup had aggressively branded itself as a one-click checkout revolution, no amount of hype was able to save it from crashing when investor money dried up. And if you ask industry experts, it won’t be the last fintech to collapse in the months to come.

“When the tide goes out you’ll know who’s swimming naked,” James Allum, SVP and regional head of Europe at fintech Payoneer, tells Verdict.

He and other market stakeholders suggest that the fintech industry will suffer a mass-cleanse of startups only held up by investor optimism, hype, good intentions and over-heated markets. “We talk about it almost daily” Allum says.

The argument is that the sector has enjoyed a boom thanks to the pandemic. Now, as society regains a modicum of normality, it is due for a market correction. In short, the world has caught up with the industry. The market uncertainties caused by the war in Ukraine and the retaliatory sanctions the West has hurled at Vladimir Putin’s regime add to the mix. It’s a recipe for trouble.

“The current macro environment of rising interest rates, Russia’s invasion of Ukraine, and the recent tech correction in public markets will have a trickle-down effect on startups generally,” Kevin Chong, co-head of Outward VC, a London-based venture capital firm, tells Verdict. “Initially, the effect will be felt most at the later stages of VC, though even at the earlier stages we can expect to start seeing a recalibration of valuations.”

So how worried should fintech innovators really be? The answer: quite. However, there are some hints of lights at the end of the tunnel. But before we get to that, let’s discuss how bad things really have become.

The fintech investment should leave some worried

Money is running low. That’s what a growing number of researchers says. Fintech leaders should be concerned about this for one simple reason: businesses run on cash. This is especially true for startups that have yet to become profitable. So reports about investors putting less money into the sector should worry them.

Research firm CB Insights has said that there was an 18% drop in fintech funding between the last quarter of 2021 and the first of 2022. That is the biggest percentage drop since 2018. The analysts put the amount injected into the industry at $28.8bn in Q1.

FinTech Global has similarly suggested that the sector could experience a 7% decrease in the money raised in 2022 compared to the amounts raised in 2021.

Fintech funding dipped slightly at the start of the year. In 2019, VCs injected over $32.1bn into the fintech industry across 1,821 deals, according to data from research firm GlobalData. That figure skyrocketed over the next two years. Fintech ventures raised over $84.5bn across 2,356 deals in 2021. The industry has raised $20.3bn across 614 deals in 2022 so far.

While that is lower than the grand total of the amounts raised in 2021, VC deals are still on track to overtake the amount raised in 2019 and 2020.

Equity offering deals paint a more solemn picture. Like VC deals, these deals shot up to record height over the course of the pandemic. Fintech companies raised over $52.8bn across 248 deals in 2019. In 2021, that figure dropped slightly to $45.4bn across 200 deals. So far in 2022, GlobalData has only recorded seven deals worth $159m in total.

Private equity deals are seemingly experiencing a similar slump, according to the GlobalData data. The industry received $24.4bn worth of funding across 150 deals in 2022. That is an increase from 2020 when the industry enjoyed 169 deals worth a total of $7.8bn. So far, there have only been 43 private equity deals going into the fintech industry in 2022. They were worth just over $1.5bn in total.

Debt offering deals have also dropped in number and in value. There were 173 deals worth $90.3bn in 2021. To date, there have only been 14 debt offering deals in the fintech space. They were worth a combined $2.2bn

The picture is clear. The data and the previous research suggest that there is indeed a slight dip in fintech investment deals.

Investors could've lost interest for a number of reasons. Market uncertainties and the fragile state of geopolitical affairs are certainly key factors behind their hesitation. It is hardly an ideal market for new ventures to attempt to attract financial backing.

"[It] seems obvious that there would be a slowdown in fintech investment," Mark Hartley, founder and CEO at banking software developer BankiFi, tells Verdict.

Funding is not the only indicator that should send stakeholders shaking with trepidation. Publicly traded fintech companies have seen their shares drop over the past few months too.

Free-falling stocks: Somone will pay for this later

The buy-now-pay-later (BNPL) industry is one of the big winners from Covid-19. The sector has been around for years. However, social restrictions accelerated the adoption of online shopping. This also helped propel the popularity of instalment payment services.

As a result, the BNPL industry enjoyed a surge of investment. Klarna achieved a $45.6bn valuation on the back of $639m raise. UK-based Zilch achieved a $2bn valuation on the back of a $110m Series C round in November 2021. In February 2022, Italian BNPL startup Scalapay claims to have become a unicorn after a $497m Series B round, although it didn't disclose its valuation publicly.

Publicly traded BNPL companies enjoyed a similar boon. American Affirm went public in February 2021. During the year, its stock climbed from $117 in January to a $164 high in November. Since then, however, its share price has fallen to $24. It is now trading with a $7bn market cap.

Other publicly traded BNPL companies have suffered a similar fate. Australian Zip has seen its stock nosedive by 80% over the past year. OpenPay traded at a record high of AUD$4.7 in August 2020. Since then, its share has collapsed. It is now trading at AUD$0.3.

The larger fintech community has echoed the BNPL industry trend. PayPal has fallen from a $308 five-year high in July last year to be trading at $81.68 at the time of writing. Twitter founder Jack Dorsey's payment giant company Block, previously known as Square, has seen its shares fallen from $276 in February 2021 to $86 in May 2022. Block acquired Australian Afterpay earlier this year.

You can see the same trend across the rest of the tech industry. While Apple and Microsoft have recovered from their January slump, companies like Meta and Netflix have not been as lucky. Larger macroeconomic trends seem to be affecting the fintech industry.

What's causing the dip?

The fintech industry doesn't exist in a vacuum. The sector is intimately linked with the rest of society. That means no single reason can be behind the investment dip on its own. Instead, it is more likely a combination of factors that have contributed to the fall.

The market uncertainty doesn't just have one big reason. US Federal Reserve officials have warned that the highest inflation rate in 40 years may be coming. Across the pond, the Bank of England predicted that the UK may suffer a recession before the end of the year, adding to the cost of living crisis caused by an end to Covid-19 support packages and exacerbated by Russia's invasion of Ukraine. Central banks have issued similar warnings in other countries too. Fintech startups should be worried over the recession threat.

"When you think that when interest rates go up, there are more attractive, safer options than putting money into a startup company," Allum says.

The pandemic is also to blame for the investment slowdown, but only in so far as to it having caused the last two years' boom in the first place.

"You kind of get this kind of camel hump in the middle," Allum says. "If you remove the extreme, it's pretty stable. You know, that [it has] just kind of gone back to pre-pandemic levels."

The recession and the post-pandemic market correction have motivated some market watchers to believe that more fintech ventures may face the same fate at Fast, which was forced to close down in April.

Fast implosion

Fast had raised $124.5m in total when it imploded. It most recently raised a $102m Series B round in January 2021. It had done so with a combination of bravado and aggressive marketing.

This didn't prevent it from failing to go toe-to-toe with the likes of Stripe and Checkout.com. The market experts Verdict has spoken with blame the implosion on Fast's failure to get market traction and to offer a unique experience.

"In my opinion, Fast hadn't discovered product-market-fit, burn rate was too high and their growth function seemed to have failed," Andy Taylor, CEO and founder at invoice solution provider Payful, tells Verdict. "This caused their implosion and I'm convinced we'll see more of these implosions, or at the very least down rounds, over the next couple of years."

When investment started to dry out, analysts believe it was only a matter of time before it fell apart. They believe it is just the beginning of a larger trend.

"I’ve actually been banging the drum about this for some time now, but the fintech boom of recent years has shared some eerie similarities with the dot-com bubble of the early 2000s," Hartley says. "You’re seeing lots of money being thrown at things that at best, are yet to be proven and, which at worst, represent big bets on solutions that may never materialise. Ultimately, there needs to be a correction in the market."

You can apply the same logic about the overarching macro themes to explain why several fintech companies have sacked big swaths of their workforce recently.

Fintech layoffs

A smattering of mass layoffs have created headlines, adding to the fears that something is up in the sector.

Robinhood, the stocktrading app that went public last year after the pandemic set its growth into hyperdrive, announced in April that it would sack 9% of its employees. CEO Vlad Tenev said Robinhood had accidentally duplicated several roles during its recent hiring spree. He argued that axing these roles was just a responsible correction.

Australian BNPL company BizPay laid off 30% of its workforce in May, quoting tougher market conditions as the reason behind it. Then Mainstreet's CEO announced on Twitter that about 30% of its workforce would be shown the door.

The fintech sector is not alone. The tech industry in general has made similar layoffs. Home-workout startup Peloton axed 2,800 roles in February. Netflix chopped its staff numbers at its fan site Tudum in May.

On Deck, a matchmaker for VCs and founders, has also reportedly laid off 25% of its staff. Customised celebrity video platform Cameo has fired 25% of its staff.

Industry stakeholders believe these are just the first of many companies to feel the squeeze. Market volatility will intensify in the upcoming months. For fintech businesses looking to survive the downturn, cutting staff is increasingly becoming a viable option.

"When you’re spending considerably on labour costs then that becomes an obvious area to cut," Hartley says. "It’s not an aspect of business that anyone enjoys, but it remains a tried and tested way to bring down costs and to ensure that cash flow remains manageable. Sadly, it’s an approach that many fintech businesses may soon have to adopt in order to stay afloat."

How worried should the fintech community be?

Investment is drying up. Fintech stocks are plummeting. Startups are imploding. Companies are firing workers in droves. These things don't sound like a recipe for optimism. However, several of the fintech watchers and stakeholders Verdict has spoken with are surprisingly bullish about their prospects.

"It’s possible we are entering a rough period from a global economic growth perspective, but the fintech industry shouldn’t be too worried because great companies will find a way to raise additional capital if needed," Rob Straathof, CEO of embedded finance provider Liberis, tells Verdict.

"This may not be at the lofty valuations we have seen over the past two or three years, meaning some fintechs may go through down rounds or see more onerous preferred equity structures to decrease the investment risk to new investors. The next 12 to 18 months will be a great time for fintechs to focus on profitability or decreasing burn rates, increasing revenues as well as unit economics."

Could it be good for the sector?

Others suggests that the drop in investment could be a good thing for the industry as a whole, at least in the long run. They believe only companies that truly have something good to sell will survive the squeeze, leaving investors to recalibrate who they back.

"Honestly, if early signals do turn out to be the start of a longer-term downturn, I think it could be healthy for the sector," Kimberley Waldron, managing director at tech-focused PR agency SkyParlour, tells Verdict.

"There has become a bit of a split between building for your customer or building for your investor, which is normal to a point. However, I think the balance has tipped massively in favour of building for investment which has a knock-on effect, creating too many unsustainable fintech solutions in need of a problem to solve."

Her fintech clients tell her that they expect there to be focus on learning from past mistakes to avoid hyper-valuations and unrealistic expectations.

"There’s been pressure for many to rush through the funding rounds to maximise access to cash as it’s free-flowing and VCs are ‘prowling’ the market," Waldron says.

"There is a focus on sustainability and alignment to bigger international issues – I think there’s a little caution and a waking sense of reality. A slight split between the fintechs chasing profit and sustainability, and those that are still chasing unicorn or decacorn status."

While a potential market slowdown could be good for the fintech industry, it is a small comfort for the people who will lose their jobs in the meantime.

GlobalData is the parent company of Verdict and its sister publications.

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