Where will fintech go next in 2023?
2022 saw an end to the low-inflation and Covid-driven online spending that had created bonanza years for many fintechs and tech businesses, both in terms of their end markets for online consumer-driven businesses and funding valuations.
2023 will no doubt bring more surprises for the fintech industry and tough times for many
Stock prices tumbled and private market funding followed suit. In the UK, fintech investment dropped in Q3 to £491 million compared to £2.1 billion invested in Q2, according to data from Beauhurst and Deloitte.
B2B fintechs serving the broad corporate arena (rather than being focused on e-commerce) have fared better and will continue to do so in 2023. Economic slowdowns always drive innovation, and this coupled with a focus on regulatory excellence will benefit the leading players and drive out weaker ones, creating a stronger sector coming out of the downturn. Embedded finance continues to draw more and more interest and within that, the use of B2B embedded payments remains a largely untapped resource in the corporate world.
Regulatory focus will increase
The opening up of payments regulation to permit non-bank service providers in the EU and UK has opened up competition, driven innovation and delivered better financial services to consumers and businesses.
It’s important to stress that the opening up of regulation, sometimes referred to as deregulation, does not mean less regulation or lighter rules. An example would be the opening up of payment provision to non-banks. Electronic Money Institutions (EMIs) could not have existed without these regulatory moves. But EMIs are held up to the same rules by their regulators as banks in respect to payment services – although with respect to customer funds, banks are governed by capital adequacy rules, whereas EMI customer funds are protected by safeguarding rules.
We have sometimes heard fintechs claim they have an advantage against incumbents because of their “lighter regulation”. Not only is this untrue, it undermines confidence in our industry. And it will likely come home to roost in 2023. We see increased scrutiny and intervention of banks and non-banks across a number of areas relating to levels of compliance, AML and financial crime, consumer fraud, crypto propositions, end-customer due-diligence and the safety of their customers’ funds. All of these are exacerbated by the broader economic uncertainty.
A key theme for 2023 will be those that embrace the principles of regulation will succeed, recognising they are complimentary to commercial success when done well. However, any firm that hasn’t understood or prioritised the embedding of a robust culture of control and regulatory compliance as part of their business model will find it difficult to continue to operate while new entrants face increasing costs and regulatory scrutiny prior to authorisation.
The industry can respond in many ways. Examples for our segment would be additional access to central banks to remove dependencies on (and limitations of) incumbent banks, tackling increasing threats like fraud and the cross-industry adoption of a holistic approach to consumer awareness of fraud. Authorised push payment fraud is an example here. Consumers and governments need to have a better understanding of the scams involved and the use of the internet and telecoms accounts to perpetrate the fraud. More knowledge is central to the task of reducing that fraud.
Hard times will drive innovation
Forbes called 2022 the year of layoffs in fintech. Banks and fintechs are letting staff go to balance their weaker income expectations or to reduce cash burn in the face of a tough funding environment.
But downturns are frequently the birthplace of successful businesses. Google and Facebook were both nurtured in the 2000 tech bubble aftermath. Looking at fintechs, Adyen was founded in 2006 and Stripe was founded in 2009, straddling the 2008-2009 downturn.
Not only do slowdowns foster innovation, in many cases the innovative products already exist but are not yet widely adopted. The economic slowdown will drive adoption as customers look to improve productivity and efficiency. B2B embedded payments is one such example.
B2B embedded payments will help solve business friction points
Right now, one of the big hurdles in B2B payments is the high fully loaded cost and inflexibility of payment processes. With the economic situation as it is, businesses need to look at every angle to streamline their processes and create new revenue streams.
Embedded payments are the catalyst to unlock new ways of doing things – from making and receiving payments, controlling and using payments data, reducing errors and maximising security. Embedded payments means that account creation and payments are integrated into software platforms via APIs and webhooks. This removes the need for a handover to finance teams to complete a payment or reconcile an account. Not only does this provide a smoother experience for customers, it also has the capability to automatically process and reconcile large volumes of payments which will save time and resources. And it enables new products and revenue streams for customers. Embedded payments will allow businesses to focus on innovation and remain competitive in a tough economic environment.
People today think of embedded payments the same way people thought of cloud computing in the 2000s. Back then it was unheard of that you would want to run software on anything other than a server sitting in your or a customer’s data centre. In much the same way today, it’s hard for many CFOs of CPOs to imagine that you would use anything other than a bank to manage your finances.
Embedded payments can be described as part of the next evolution of the tech stack that started with the internet and added cloud and mobile. The next layer is embedded financial services as part of the stack rather than a separate service offering, an idea we first saw written about back in 2019 by Matt Harris at Bain Capital Ventures.
As with cloud adoption, the flexibility and equivalent regulatory regime inherent in embedded payments will translate into broader adoption.
Looking to 2023
2023 will no doubt bring more surprises for the fintech industry and tough times for many. But businesses that build for agility and focus on innovation will inevitably have greater success. Embedded payments will also start to become better understood and as a result we will see early adopters drive new efficiencies and ultimately be able to navigate the rocky waters with greater ease.
