A Reality Check for Fintech in 2024

The fintech industry, once flourishing with ample funding and a favorable economy, is now facing a new reality.

Fintech funding plummeted 50% in 2023, marking a dramatic reversal from the industry's recent frenzy. CBInsights reports that global funding declined to $39.2 billion, while deal volume shrunk by 38% to 3,801, the lowest levels since 2017. Notably, Q4'23 saw the fewest fintech deals in seven years, highlighting the stark slowdown. Banking tech suffered the most significant decline in funding, with a 72% drop compared to the previous year. Payments funding, though not immune, fared best with a 31% decline. 

The decline in funding for banking tech startups likely stems from the perceived flaws of the neobank business model.  This model is marked by a dependence on interchange fees for revenue, high customer acquisition costs, and the pressure to launch expensive products to stay competitive, all while still leaning on traditional banks for back-end infrastructure. On the other hand, the resilience of payments funding can likely be attributed to digital payments’ continuous vertical integration across various sectors. By addressing industry-specific challenges, payments companies become invaluable partners, capitalizing on their deep integration across multiple verticals..

Industry-wide Implications

While broader economic concerns affect all industries, fintech experiences a different kind of exposure. For example, one challenge is the impact of rising interest rates, which leads to loan losses as both consumers and businesses now face higher borrowing costs. This, in turn, has a ripple effect on other industries by reducing investment and creating tighter financial conditions. Industries like healthcare, though impacted by rising healthcare costs, feel the effects later in the chain. Fintech's core functions make it the initial domino in this economic cascade, highlighting its crucial role and vulnerability in challenging times. 

Other factors that likely contributed to the decline in fintech funding include

• Macro headwinds: The overall VC slowdown is a result of various elements, including increased interest rates impacting cash flow, heightened geopolitical tensions escalating risk, and supply chain disruptions adding to unpredictability.

• Post-pandemic market adjustment: Following a phase of remarkable expansion fueled by pandemic-related factors such as low-interest rates, stimulus payments, and a digital adoption surge, the fintech sector is now adjusting to a new market environment.

• Shift in investor priorities: There's a growing trend among investors to prioritize sustainable business models and proven profitability over the previous emphasis on high-growth, low-profit valuations that plagued the industry. 

Prediction for Areas of Opportunity

While the market recalibration poses challenges, it also unlocks exciting opportunities for the fintech industry. Some companies may face setbacks, but others have a chance to shine by strategically positioning themselves and developing innovative solutions. Established players can leverage their experience and resources to solidify their positions, while agile startups with strong fundamentals can gain a competitive edge by addressing emerging needs.

Beyond the macro environment, powerful forces like technological advancements and evolving regulations continue to propel the need for fintech. In 2024, I see particular promise in areas like:

B2B Real-Time Payments

With rising interest rates squeezing margins, businesses are turning to innovative solutions like instant payments to streamline operations and elevate customer value. This technology will increasingly play a pivotal role in reshaping the B2B payment landscape in 2024.

For sellers, instant payments mean immediate access to funds, boosting cash flow and improving financial forecasting. Payers benefit from settled transactions and greater control over their finances. For cross-border transactions, instant payment offers transparency and enhanced account verification.

For B2B payment providers to achieve success, it is crucial for them to recognize the need to meet customers where they are, whether they're still relying on manual processes or just starting their digital transformation journey. This means offering user-friendly interfaces, seamless integration with existing systems, and flexible solutions that cater to varying needs.

Of course, challenges remain. Scalability, fraud prevention, and integration costs require careful consideration. However, the potential benefits for both sellers and payers are undeniable. As the technology matures and regulations evolve, instant payments are likely to become a ubiquitous feature of the B2B payments landscape.

AI

In 2023, the spotlight was on the significant benefits AI brought to productivity and efficiency. This focus led to a substantial increase in AI adoption across various sectors. However, as we venture into 2024, the dialogue around AI will probably take a new direction. The discussion will pivot from simply implementing these AI models to focusing on data privacy, bias detection, and explainability, alongside increased transparency in development and decision-making processes.

AI models are only as effective as the data they're built upon; inherent biases in this data can lead to skewed outcomes. Therefore, managing such biases becomes paramount. Transparency in AI has also become a critical issue. This, however, presents a paradox; while it enhances trust, it could potentially expose a company to security risks or increased liability. Despite these challenges, the need for transparency and bias management is undeniable. More fintechs and banks will be working towards ethical AI practices that include model auditing to ensure fairness and accountability.

Open Banking

The Consumer Financial Protection Bureau has put forth an open banking draft rule set to finalize in 2024. This rule aims to transform the financial sector by empowering consumers with more control over their financial data and making it easier to switch banks for better rates and services.

The proposed rule intends to standardize consumer data access and protection across the industry, promoting data sharing and competition among financial institutions. It seeks to address the current lack of uniformity in accessing financial data, which varies based on lenders' policies, by granting consumers the right to share their data with companies of their choice. This step is expected to unlock a new suite of products and services..

On a related note, Apple is piloting a feature for UK Apple Wallet users, allowing them to view their bank account balance and transaction history within the app itself. This expansion into open banking enables users to monitor their finances and make informed spending choices without needing a separate banking app. This significant advancement for Apple along with the new data policies signals that there will be a rise in open banking solutions in the US.

The common thread among these highlighted areas is transparency, which I believe will be the defining factor for the fintech industry in 2024. This emphasis on transparency will serve as a catalyst for increased investment in the industry. With an understanding of the new standards for gaining funding, fintech founders will be able to adapt their business models, efficiently reach product-market fit, and once again establish themselves as one of the most supported industries. Speaking better markets into existence for 2024!

-Kiswana