What does a recession mean for fintech?

In the world of fintech, a problem is just an invitation to innovate

2019 is upon us, and just like every year, the great economists and financial gurus are currently engaged in one of my favorite annual rituals: attempting to predict what the next 12 months will look like for the world’s economies. This is, of course, impossible.

And yet it never seems to slow down the number of writers I see making their bold predictions known. The ritual always brings to mind the classic joke: an economist will tell you tomorrow why the predictions he made yesterday didn’t come true today.

This year’s predictions are varied, but most people seem to agree that the most likely outcome for 2019 ranges between a slight slowdown on one side and a full-blown recession on the other side. I’m not at all qualified to offer an opinion on macroeconomic trends of that magnitude, but if some of the global economic powerhouses were to experience a slowdown, the question that interests me is: what would a recession mean for fintech?

It’s a really difficult question to answer, partly because there’s not a lot of historical information to pull from. The origin of the word “fintech” can be traced all the way back to the 1980s, but most people that I know would say the current fintech boom started somewhere around the subprime banking crisis of 2007/2008 (2007 was also the year that the first iPhone came out, and, not coincidentally, was the year of the first ever Finovate conference). Based on that timing, the current fintech ecosystem has only really existed in the economic expansion cycle, which immediately followed the Great Recession.

So we haven’t seen what happens to the fintech market during a large-scale recession cycle – should we be scared to find out? For me, the answer is a resounding no. Before I get too far, I should state the obvious: recessions are not desirable for any number of reasons. But when it comes to fintech, they may not be so terrible. In fact, my guess is there are actually some significant positives for the overall fintech ecosystem that can come out of a cooling global marketplace (as long as the recession isn’t too severe).

First off, an economic downturn forces everyone to look more closely at the processes that define the status quo. When everything is humming along smoothly, it’s easy to justify systemic inefficiencies. If the current processes are working well, why rock the boat? This is especially true for large, traditional banks and financial institutions, who are notorious for being wary of potential sources of risk, and any change brings some element of risk with it.

When things start to slow down, though, the potential benefits from engaging with innovative new technology look more attractive and the potential risks can start to look smaller. Instead of simply being curious about what kinds of fintech solutions are out there, banks will start to explore problem areas that are in need of updating. Fintech tools that can get customers onboarded more efficiently can save valuable time and money, and so can technology that solves customer service problems or gives customers the means to help themselves. Maximizing the value of each customer becomes paramount, and this is an area where fintech has a lot to contribute.

While a slowdown can help motivate banks to engage with fintech more, it can also give fintechs a specific target to shoot for. In my time at Finovate, I’ve seen a huge number of really cool pieces of technology that never seem to find a home (see my “$2 bill fintech” article). Why? Because a lot of the “coolest” technology could be thought of as solutions that are searching for a problem. In the absence of a specific problem to solve, many innovators will look to create the coolest technology they can in the hope that they’ll find someone to buy it. This leads to very entertaining and impressive on-stage demos, but it doesn’t always make financial sense for anyone to engage with it.

As more specific problems start to come to light, though, innovators (and the VCs who back them) have something concrete to tackle, confident in the knowledge that there is already a market that wants to buy what they make. You can see this phenomenon play out in fields like security and identity verification – every highly publicized hacking scandal breeds several solutions that are explicitly designed as a response to the weakness that was exploited. The same is true for things like new governmental regulations or compliance requirements. The implementation of PSD2 created a well-documented pain point for European banks, but it also led directly to a host of new fintech innovations designed to make the process less onerous.

Finally, an economic slowdown provides a greater incentive for people with inside knowledge of banking systems (and their inefficiencies) to “switch teams” by partnering with techies to create new products. Many financial institutions will lay off staff or offer incentives for executives to retire early as a way to reduce overhead when things tighten up, which can release a lot of knowledge and expertise into the labor market. The “ex-banker-plus-coder” team is something we saw a lot of at Finovate in the early 2010s (after a similar round of financial industry belt-tightening), and it can frequently lead to very useful, profitable products. As far as the tech side of fintech has come in recent years, there is still no substitute for hands-on experience working on the inside of a major financial institution.

Fintech is an industry that thrives when there are specific problems to solve, and I’m always amazed at how quickly intelligent innovators jump head first into really difficult situations. While any economic slowdown has (obvious) downsides, fintech has proven that it’s more resilient than a lot of other tech areas. I’m not too worried about what will happen to the ecosystem whenever the next recession comes (and no matter when you think it’s going to happen, there’s no doubt that there will eventually be another recession).

Whenever the next recession comes, it’s sure to bring with it a host of problems. But in the world of fintech, a problem is just an invitation to innovate.

This article is also featured in the February 2019 issue of the Banking Technology magazine.
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