The financial technology industry is currently experiencing a shift towards what some industry executives and investors believe to be a “bottom.” The unsustainable highs of 2020 and 2021 have been corrected, leading to a market that has “recalibrated.” Embedded finance, where technology companies sell financial services software to other companies, has become more focused on solid use cases and business models, rather than lofty ideas fueled by massive VC funding.
The Evolution of Funding
In 2021, global fintech funding reached an all-time high of $238.9 billion, with companies like Block, Affirm, Klarna, and Revolut reaching sky-high valuations. However, by 2022, investment levels plummeted, with fintechs raising only $164.1 billion. This trend continued into 2023, with funding dropping even further to $113.7 billion, marking a five-year low. Despite the growth of many companies, higher interest rates have made funding scarce and more expensive.
The Influence of Artificial Intelligence
According to Prajit Nanu, CEO of Nium, investors have been overly focused on artificial intelligence, neglecting the innovative products and growth stories within the fintech industry. Nanu compares this to the “craziness” of frothy valuations seen in 2020 and 2021, believing that the market has now reached a “bottom.” He sees this as a prime opportunity to thrive in the fintech sector and is exploring acquisition opportunities for Nium.
The Rise of Cryptocurrencies
Crypto made a noticeable comeback in terms of hype and interest at this year’s Money20/20 event. Major players like Ripple, Fireblocks, and Token8 showcased their offerings, generating excitement among attendees. Crypto exchange CoinW, endorsed by soccer star Andrea Pirlo, had a prominent presence at the conference. Fintech executives and investors are finally seeing a tangible use case for cryptocurrencies, shifting away from mere speculation about their role in the future of finance.
While AI has promised to revolutionize financial management, it has yet to significantly impact payment infrastructure. James Black, partner at VC firm IVP, highlights the potential of stablecoins, tokens that match real-world asset values like the U.S. dollar, to drive mass adoption in the crypto space. ClearBank, a UK embedded finance startup, is working on launching a stablecoin backed by the British pound, aiming to gain approval from the Bank of England. CEO Emma Hagen emphasizes the importance of building trust and safety around stablecoin issuance.
As the fintech industry continues to evolve, consolidation and strategic partnerships will play a crucial role in navigating the changing landscape. While traditional financial institutions, payment companies, and tech giants showcase their latest solutions, the focus is shifting towards sustainable business models and practical use cases. With the right approach to innovation and adaptation, fintech companies can thrive in the midst of market fluctuations and regulatory challenges.