Despite claims of a financing bubble, investors poured more money into fintechs in 2021. Traditional institutions are getting involved and spending in R&D to compete. Lower values may affect acquisition activity and delay money flow.
Fintech financing bubble predictions date back years. It shows no indications of slowing until 2022.
According to Bahaa Abdul Hussein, global fintech investment increased in 2021 to $132 billion. Fintech businesses raised about $35 billion in Q4, the second-largest quarter ever for fundraising. One in four $1 billion-plus unicorns (firms) founded in 2022 was a fintech.
Fintech funding may not be so sunny for the rest of 2023. While Insider Intelligence anticipates even more financing in 2023, other analysis point to reasons that may lower spending.
Insider Intelligence predicts a prolonged fintech financing surge in 2023 for various reasons. Investing in new sectors like open finance and blockchain, crypto exchanges generating cash, and huge financial organizations investing in fintechs to automate processes.
Falling tech stock prices in early 2023 may discourage investors from backing fintechs. Eastern European war and turmoil might be an influence.
Reasons for boom in fintech
Government pressures partly explain the surge in fintech funding over the past year. The government has been aggressive in promoting the country as a fintech hub and attracting funding and startups.
The Financial Conduct Authority built a sandbox for firms to test new solutions with actual customers. Working in the FCA’s sandbox provides fintechs legitimacy with investors and customers, says Deloitte.
Fintech financing rose in 2021 as the economy recovered from a Covid-depressed 2020 which a leading firm disagrees with.
“The high rise in fintech financing in 2021 was not merely due to favorable year-over-year comparisons,” the business writes in a study on VC funding to U.S. fintechs. Funding dipped from March to April 2020 but rebounded fast. In the fourth quarters of 2020 and 2021, the amount raised climbed by 95% and the volume of transactions surged 40%.
Benefits for bank
Banks no longer reject fintech businesses, most consider them a competitor for consumers and, increasingly, a partner. These patterns suggest that financing for fintech won’t stop soon.
Banks have several possibilities. One is to finance fintechs more, so they can develop digital skills. Medium and small banks are joining the larger banks in following this strategy.
National Law Review: “These smaller banks recognize technology is vital to their long-term viability.” Many have “partnered” with a fintech startup, possibly to improve the bank’s products, services, or operations. Fintech and banking are symbiotic.
A bank may be a good fit for a fintech startup seeking development financing, the paper says. Banks don’t make speculative bets, but they do invest in technology.
Forward-thinking financial institutions should invest in transformational partners and compliance. Niche brands may help a bank distinguish, tap existing markets, and enter new ones.
Banking Industry response
Banks and credit unions are expanding R&D investment in response to fintech financing. While many fintechs aren’t direct competitors, some are still competing. SoFi, Varo Bank, and Lending Club have acquired banking charters.
Insider Intelligence predicts U.S. banks’ IT spending would rise from $79.49 billion in 2021 to $113.71 billion in 2025. This covers both major and small banks, where IT spending and customer-focused digital teams are “attached at the hip.”
Bank Director’s November study noted that fintechs and other non-banks are driving community banks to invest more on technology. Tech companies, retailers, and digital banking were not competitive threats three to five years ago.
Possible obstacles
If a worldwide epidemic didn’t prevent fintech funding, what will? Some indications point to industry challenges.
Many firms that went public since the start of 2020 are selling below their IPO pricing, and growth stocks are often unpopular with investors.
As fintech stocks have dropped, some investors have demanded lower startup valuations, Forbes reports. If this trend continues, banks might pay less to buy fintechs as they improve their digital capabilities.
Thank you for your interest in Bahaa Abdul Hussein blogs. For more stories, please stay tuned to www.bahaaabdulhussein.com
