The fintech landscape continues to evolve at speed. Recently it has faced various setbacks including a cooling of appetite for crypto risk and a tightening in the VC funding market. But the forces of innovation propelling the digitisation of all aspects of financial services are only growing stronger. It is against this backdrop that we consider some of the trends in fintech in the near to medium term.
1. M&A growth
Fintechs are finding the going tough in terms of fundraising. Many are still pre-profit (some pre-revenue even) and access to capital to fund their capex, growth and customer acquisition is key. As VCs and growth capital providers slow the pace of investment and banks reverse gear in terms of their appetite to provide annual recurring revenue loans (ARR), we consider it likely that fintechs will find themselves playing a consolidation game, looking to leverage synergies and build scale through acquisitions. Rather than pay in cash, fintechs are likely to combine on a cashless basis by issuing their own equity as consideration.
2. Strategic Partnerships
A quick answer to address the spiraling costs of customer acquisition is to be found in the faithful ranks of traditional bank customers. The very institutions that many fintechs are seeking to disrupt or intermediate (primarily the incumbent tier one banks and insurers) are in fact providing fintechs with part of the solution to their growing pains. By partnering together, banks and fintechs are seeing the benefits of a symbiotic relationship in which banks bring the critical assets of trust, robust regulatory infrastructure and a loyal customer base, and fintechs provide the innovation, technology and cloud native user experience that is critical to a bank's digital transformation strategy.
3. Crypto currencies
Has fiat won the battle over crypto? Certainly recent events would have you believe so. However, any sense of victory for the sceptics will be short lived. Token values are recovering, networks are migrating away from the energy intensive Proof of Work basis to a more efficient Proof of Stake approach, there is growing appetite for embedding smart contracts into tokens (e.g. creating non-fungible tokens or NFTs), and there continues to be high investment in digital worlds suitable only for crypto currencies and tokens. These factors point towards a resurgent (although perhaps changed) crypto community thriving over the longer term. So much so that concerns over the risks and threats such crypto currencies pose is forcing central banks to fast track plans to establish their own central bank digital currencies (CBDCs). Many are making preparations to create DLT-based currencies they can regulate and control that will one day not only replace their non-digital predecessors, fiat currencies, but also prevail over the more "anarchic" (or should we say "democratic") decentralised digital rivals.
4. Acceleration of the digitisation of market infrastructure
Out of sight (and mind) of most consumers or retail securities holders sits a vast unwieldly network of intermediaries that, together, provide the financial plumbing for the whole financial system: payments, settlement, custody, agency, registrars, clearing, etc. The actors within this network have, to date, approached digitisation with varying degrees of enthusiasm and speed, some no doubt driven by vested interests in resisting technological leaps that will threaten their very existence. However, new financial markets are opening across the world and being built from the ground up on a digital footing. History shows that capital moves swiftly to markets that are most efficient and provide the least friction. Competitive pressures will break through vested interests. Markets will accelerate the overhaul of legacy infrastructure models in favour of digital alternatives offered by fintechs.
5. Regulation proliferation
All the above will require regulators globally to be on their toes, adapting existing legal frameworks to modern financial technologies, collaborating with peer regulators across the global financial market, and designing new guardrails to ensure systemic risks and consumer vulnerabilities are managed. Evidence suggests that they very much have this task in their sights, but the role is unenviable. They need to keep ahead of a fast moving and complex digital transition whilst addressing the deeply polarised concerns of market actors – some pushing for regulation or outlawing of e.g. crypto currencies and others driving in the opposite direction.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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