After a record-breaking year of fundraising and growth in 2021, many European fintechs were forced to step on the brakes in 2022.
As access to fresh investment dried up, the sector saw some of the biggest layoffs, the first downrounds and the first insolvencies in European tech.
Heading into 2023, industry watchers expect even more of the same. As the tech sector that’s closest to financial markets, a slowdown in economic growth will have a direct impact on fintech revenues. But some business models will be more at risk than others.
To find out who might sink or swim, Sifted asked the experts for their predictions for the year ahead.
Here’s what they had to say.
2023 will be the year of insurtech
It’s tempting to look at public markets and try and glean what’s recession "resistant". There’s always a good case for a demonstrable improvement on the way things are done, and there are still really strong inefficiencies in financial services.
Insurtech is a particularly "recession-resistant" sector. Often they’re compulsory products. The IPOs of 2020 took the sheen off insurtech slightly, because most are trading substantially below their IPO prices, so investors have been a bit fickle in that space.
But risk management tends to be something that consumers (both businesses and retail consumers) pay attention to in a down market.
— Ruth Foxe Blader, partner at Anthemis
… and other fintechs managing risk
It feels like we can continue to expect material FX [foreign exchange] volatility due to economic and political actions next year. I’d forecast many of the fintechs who are solving FX risk for small and large companies to have fantastic years throughout 2023 as they continue to solve an acute pain felt by most businesses involved in international trade.
— Nick Sando, principal at Octopus Ventures
CFO tools will show their mettle
2023 is not going to be an easy one. Valuations in public markets are unlikely to get back to 2021 levels soon and VC funding will match the dynamics in public markets, especially at post [Series]-A stages.
It means there is definitely more focus on the fundamentals of a business (unit economics, ultimate path to profitability) as well as runway. Cash is king, and many cash management and forecasting tools and CFO tools are yet to gain serious scalable traction and adoption.
There have been multiple companies who raised great rounds in 2021-22, but none of them have yet become “the must use” for CFOs. We'll see who’s gaining bigger market share and winning the market. I don’t expect new seed companies to appear as there were multiple last year, but now we’ll see who’s the winner.
— Olga Shikhantsova, partner at SpeedInvest
2023 will be a turning point for climate fintech
2023 is set to be a very interesting year for climate regulation as the Fit for 55 (the EU’s legally binding commitment to reduce emissions by 55% by 2030) package puts pressure on regulators.
The package includes proposals to reform high-profile schemes such as the cap-and-trade scheme as well as cracking down on carbon leakage through the offshoring of carbon-intensive activities. These reforms will keep paving the way for one of the most exciting opportunities in the fintech investment space.
— Nick Sando, principal at Octopus Ventures
Perhaps 2023 is the year we’ll start seeing real businesses being built at the crossover of financial services and sustainability. Up until now, we have been somewhat underwhelmed by this space, but it feels like 2023 could be the breakthrough year, and perhaps in ways that are different to where funding has gone so far. So, less about analytics and ESG reporting, and more about how sustainability is embedding into people's lifestyles, from consumption to real estate or mobility.
— Manuel Silva Martínez, general partner at Mouro Capital
Big banks will have more cash to acquire fintechs
Banks will see profits increase in the face of higher rates, and come out stronger from this recession compared to how they fared in 2008.
If price to book ratios improve for legacy banks, they are likely to start thinking more proactively about acquisitions. Banks that already have higher valuation ratios — such as some of the big US banks — will already be active, and we'll see them making more acquisitions in 2023.
Banks will be most interested in acquiring companies that are in the banking space, in particular to boost their product offering and product capabilities.
When banks look to acquire each other, they usually think in terms of expanding their footprint or customer base, but in the case of looking to acquire fintechs they may be more interested in innovative products with a proven market fit that they can plug into their current portfolio of products. These products can range from more niche consumer-facing apps to lending products targeted at SMEs that have found an innovative way to ingest data and thus underwrite companies better — the spectrum is quite wide!
Finally, it would not be at all surprising to see an acquisition or two of neobanks — and conversely, some well-funded neobanks acquiring a smaller bank.
— Yusuf Özdalga, partner at QED Investors
Fintech mergers and acquisitions (M&A) will take off
I think all fintech sectors will see M&A activity increase: Payments; wealth management; lending; and neobanks, just to name a few. The dynamics driving M&A apply broadly — and while there are nuances across subsectors, the overarching theme of M&A will be a constant.
— Yusuf Özdalga, partner at QED Investors
In 2023 I think you may see a good deal of consolidation and some administration in the banking-as-a-service [BaaS] vertical. 2021 saw a great deal of funding into the BaaS category. Many of the BaaS providers have customer bases heavily skewed towards very early-stage fintechs, some of which will likely continue to find it difficult to operate and raise in 2023.
This will likely lead to increased customer churn and revenue per customer falling for some of the BaaS providers. However, many BaaS fintechs made it clear that they wanted to differentiate away from early-stage fintech and into other industries like health and travel, and those companies should emerge stronger provided they stuck with their strategy.
— Nick Sando, principal at Octopus Ventures
Crypto won’t make an overnight recovery
“Crypto and DeFi [decentralised finance] are clearly having a rocky start and it won't get easier overnight. Fundamentally, digital assets are yet to show their huge potential in creating more liquid and fair capital markets and making payments cheaper and faster.
DeFi is yet to find its product-market fit in more specific use cases. More regulations are to follow, which creates an opportunity for all compliance-first crypto solutions. This will also create a framework for incumbents to feel more comfortable in the space, making another step towards broader adoption.
— Olga Shikhantsova, partner at SpeedInvest
The crypto meltdown of 2022, with the FTX collapse most recently, will likely mark the end of an era of unregulated crypto markets. What comes next is increased regulatory scrutiny, acceleration of regulatory frameworks across the world and growing demand for compliance solutions across the traditional finance and crypto sectors.
— Magda Posluszny, senior associate at Lakestar
The fintech operator-founder flywheel will continue
I am expecting to see a lot of novel ideas emerge at the early (pre-seed and seed) stages, resulting from the perfect storm of tonnes of fintech talent having been laid off from otherwise great companies, and the recent overfunding of fintech-hyped spaces that should push these new founding teams to really think hard about new problems in the space.
Expect lots in payments, data orchestration, security and identity, consumption facilitation — and perhaps less so in lending and retail asset management.
— Manuel Silva Martínez, general partner at Mouro Capital
Amy O’Brien is Sifted’s fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter — you can sign up here.
