Against the backdrop of the economic downturn, discussions and questions about the future of fintech are becoming increasingly frequent, making many in the industry nervous. In the first quarter of 2022, global fintech indeed saw its biggest funding decline in three years. The sector, used to getting the lion's share of funding and attention, is now under severe pressure. But that does not mean disaster. Venture capital funds continue to invest, just more cautiously. In fact, fintech investment will predictably exceed $300 billion globally by the end of 2022. However, competition for these investments between fast-changing fintech trendsetters booming in the post-pandemic era will undoubtedly intensify. 

As the World Bank report highlights, fintech is rapidly transforming the financial sector landscape and blurring the boundaries of both financial firms and the financial sector. In 2020, everything around e-commerce and BNPL was hot, and money was being thrown at these fintech companies. The crypto sector was also hot with incredible ICOs and hordes of coins that had no utility and generated interest. Even IoT was hot until it wasn't anymore. Apart from Web3 and DeFi, much of the focus at the moment is on carbon capture startups. For sure, it's only a matter of time before more startups use blockchain technology to keep a record of carbon reduction, which also links the regenerative work of land managers to the companies buying carbon credits.

Fintech seems to be entering a perfect storm situation. Therefore, below are five trends that all fintech players should look out for navigating during this challenging time but also full of opportunities.

All-encompassing embeddedness

For financial institutions, digital transformation is all-encompassing. At the same time, top-down approaches or 'directed innovation' can be slow or ineffective. So the challenge is how to marry speed and agility with compliance and security. We are already seeing a way forward here, with several new startups providing highly tailored financial services and products, often with an embedded framework. It is fascinating and often leads to genuinely delightful experiences for consumers. We are bringing payments, loans, credit checks, insurance quotes, and a host of other products directly into the platforms people use daily. Part of this delight is the newness, the surprise, and the potential. Part is how seamlessly these technologies are integrated, almost transparently to the user.

Looking into the next generation of fintech, we will also see a maturing space with more robustness in compliance, regulation, data security, privacy etc. Perhaps this renewed attention toward the essential inner workings will come about through partnerships with legacy institutions. This back and forth, combining the best of big banks and startup providers, will be a good way forward for digital transformation. Embedded payments and lending are really only the beginning. With the next generation of embedded finance products coming to market, we will look at a deeper level of engagement between businesses and their customers – for example, with embedded scoring for product recommendations. 

Scaleable technology with a pinch of luck

The success of any fintech startup depends on many different factors. From getting the product/market right to getting the first paying customer quickly, to being able to hire good people, to getting enough funding. What makes a fintech startup successful is the technology: how easy it is to integrate, how useful it is to a complex organisation and what benefits it brings. Equally important is the ability to scale and extract maximum value from service, be it data monetisation, software-as-a-service, white label or other. There are undoubtedly two other factors that, beyond the control of most startups, are also important: time and luck.

More attention to alternative data usage 

Companies that learn how to benefit from compliance and proper data handling will be agile companies succeeding soon. The latest survey shows leaders in data innovation are increasing gross margins by 9.5%. On the other hand, 67% of data innovation leaders strongly agree that their data is growing faster than they can keep up. The development of AI and Machine Learning technologies enables us to find solutions to this problem of "too much data" and deepen the usage of alternative data. Only in the UK, the total median number of Machine Learning applications in the financial sector is expected to increase by 3.5 times over the next three years. 

Using alternative data with AI & ML algorithms that Fintechs provide can indeed promote greater financial inclusion and improve lenders' profitability by understanding their customers beyond the analysis of traditional credit history data. Data collected in the context of online services, including payment habits (utility bills, rent, and monthly subscriptions), may form the basis for evaluating the creditworthiness of a borrower who has not had previous interactions with a financial services provider. Because consumers are becoming more educated about data privacy, it's especially crucial now that industry players are doubling down on their commitments to comply with  regulations while also protecting users’ data and relative rights. 

Business models with recurring revenue prioritised by investors

No matter how harsh the current investment climate is, there is still a lot of "dry powder" out there. It is cash that VC funds have raised but have not yet invested in any company and will have to be deployed for the VCs to earn their management fees. Although this is good news for the fintech ecosystem, VCs are also a lot more cautious and seem to favour startups that are profitable or have a clear path to profitability. For instance, European VCs are still in the game, but valuations have come down — particularly at the latest stages — according to a new survey of regional investors. The attention is now on startup founders' visibility on future revenue, not the probability that a sales pipeline might convert. Business models with recurring revenue seem to be favoured over pay-per-use ones, and much scrutiny appears to be going into assessing existing clients' true revenue potential rather than new ones' future potential.

Skilled leaders are more likely to succeed

In such a challenging climate, resilience and optimism are essential for building a scaling fintech. However, these traits need to be combined with experience. Skilled leaders are believed more likely to succeed than younger, less experienced ones. No matter how bright or whizz-kid someone is, you never know what you don't know. Those who experienced the 2008 downturn will remember the tactics that worked back then and won't have to go through a trial-and-error approach to identify the winning strategy. We are talking about survival. There is no time and no money to improvise. Any hesitation or mistake will simply shorten the runway. Who can afford that?