By Scott Dawson
DECTA
The greatest strategists tend to be familiar with the adage that every crisis is an opportunity. The situation fintech finds itself in, with a huge drop in investment compared with recent years, is certainly considered to be a crisis. So what opportunities can be found here? One could be found in the popular quote from author G. Michael Hopf: "Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times."
The quote has become something of a catch-all for decadence and was illustrated well by the Great Depression in the 1930s. This was a time when economic challenges wreaked havoc on communities and individuals, making it necessary to adapt, innovate and endure difficult times. The result was a tougher generation that understood the value of hard work, saving pennies and supporting their wider community.
The conceit works just as effectively if we change the word "men" to "companies" and even serves to enlighten us on the trajectory of business in the past 25 years or so. In good times, investors, flush with cash, invest in thousands of weak companies, the businesses fail, and investors are forced to find more reliable sources of profit. Then, once again flush with cash, they return to splurging billions of dollars at any startup that has managed to design a logo.
With fintech investment rapidly decreasing to a quarter of what it was a year ago (see tinyurl.com/jdm9s5w6), the sector is clearly in the hard times part of the cycle. Key to this has been interest rates: the very same mechanism that means that fuel and food is now more expensive than ever before also means that it is more expensive to borrow large sums of money.
Following the Great Recession of 2008, many first-world nations adopted zero interest rate policy (ZIRP) as a means of boosting investment. Economists say that if companies can borrow at zero or close to zero percent interest, then they should found profitable businesses, create jobs and stimulate the economy.
In theory, this is a solid strategy apart from the fact that it doesn't always work. Japan made this mistake, going so far as having negative interest rates, in the 1990s "lost decade," and it didn't work (see tinyurl.com/y6htb42y).
But a byproduct was massive investment funds like Softbank Vision Fund, which in turn supported many of the big names of the ZIRP-era: Doordash, Uber, WeWork, Revolut, Slack, FTX and Klarna, among others. That being said, FTX has since collapsed due to fraud, while WeWork went bankrupt and Uber posted its first profitable quarter last year—despite being founded in 2017 (see tinyurl.com/4cnxrbns).
However, every crisis is an opportunity, and fintech now has the chance to get more practical about creating companies that actually add value, that are of service to the community and solve problems instead of jumping from one VC cash infusion to the next.
Fintech investment in 2023 was just a quarter of what it was in 2022 and a fifth of its peak in 2021 (see tinyurl.com/3ubjvk7w). In the UK, one of the world's great fintech hubs, investment is down 57 percent (see tinyurl.com/56cufcfx). This isn't the same across the board: the percentage of VC funding going to fintech startups is down 5 percent in 2022 and 7 percent since its high of 20 percent in 2021.
The creation of new unicorns is also down significantly: 59 companies had exits of over $1 billion in the second quarter of 2021; one year later, only two companies reached that milestone. In short, VCs seemingly just aren't that into fintech anymore.
Compare this to the previous decade: PayPal, Revolut, Venmo, Stripe and Klarna became multi-billion-dollar businesses almost overnight and remain so by giving people access to services that traditional financial services companies couldn't offer: instant payments or buy-now-pay-later financing.
To find these diamonds in the rough the venture capital world had to burn through hundreds of not-so-shiny diamonds, often at great cost—those 59 startups with exits in the first quarter of 2021 aren't likely to be household names today, if they even still exist.
Anyone who has been at a fintech conference in the last 10 years might have been given a business card and tote bag by a company with a clever name, slick logo, scads of VC money, but with no offering that solves any problems. Such companies might not provide a new or better solution to an existing problem or have a real addressable market, and quite often they have no plan to become a profitable business. This preference for growth over profit is key and is one of the defining aspects of the ZIRP era. Of course, there are examples where it has been responsible for massively successful companies. Amazon dramatically cut prices of books to the point that physical bookstores were going out of business, eventually expanding its customer base so much that it cannot fail to turn a profit.
In fact, it is selling so much that even the pennies it makes on a sale add up to hundreds of billions of dollars in gross profit each year (see tinyurl.com/39pxe8f9). That being said, its rate of growth is falling—despite a marked upturn during the pandemic—from an average of around 40 percent YoY quarterly growth in the early 2010s to 30 percent later in that decade and now a flat 20 percent. It has now transitioned from a period of rapid growth to a profit-driven model, something that many other growth-oriented companies have failed to do.
Forget the days of blind VC bets on hundreds of fintech startups, hoping for a unicorn jackpot. The easy money era is over. However, this industry shake-up could well be a blessing in disguise. Instead of taking aim at every company in sight, VCs are now laser-focused, seeking rare gems with real profit potential and solutions to actual problems. This shift forces innovation and builds a stronger, more reliable fintech sector.
Investment certainly isn't as exuberant as before; investors are taking a slower, more calculated approach. This scares some startups off the volatile VC roller coaster (see tinyurl.com/3dznkbyz), but it also pushes them to explore alternative funding options, fostering resilience and adaptability.
This shift prioritizes problem-solving over hypergrowth, potentially leading to a more sustainable and impactful fintech industry. So, while the easy money days are gone, the future of fintech is looking brighter than ever, built on a foundation of innovation, purpose and resilience.
Scott Dawson, head of sales and strategic partnerships at DECTA, is a highly motivated and results oriented individual with 20 years of experience within the payments industry. Previously, he served as commercial director at Neopay. He has also held fraud management positions at PSI Holdings and Neteller, before becoming senior fraud manager and then business development manager at ClickandBuy, which was acquired by Deutsche Telekom. DECTA, www.decta.com, provides end-to-end payment infrastructure, from acquiring to issuing and processing, but unlike other players in the crowded payments marketplace the company offers bespoke-as-standard solutions aimed at making payments accessible to everyone. Contact Scott via LinkedIn at linkedin.com/in/scott-dawson-uk.
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