What a recession means for fintech

 Catalina Munteanu photo
Catalina Munteanu Engineering Manager
3min read

There’s a lot of recession talk at the moment. Are we entering the next recession? Are we already in it? We all remember the 2008 financial crisis, and, more recently, the Covid-19 pandemic and lockdowns, and all the financial trouble they caused.

Fintech in the time of Covid

But during this time, fintech flourished like never before. Investor confidence levels were up as global fintech investment reached $44bn in 2020 – an increase of 14% from 2019. Established companies saw record valuations. Visa acquired data aggregation start-up Plaid for $5.3bn (since blocked by US regulators) and SoFi bought Banking as a Service provider Galileo for £1.2bn. Stripe ($850m), Chime ($700m), and Klarna ($650m) also raised significant funding in 2020. The ecosystem was fertile ground.

Fintechs offering online or mobile banking, payments, investment or lending saw record adoption rates. In Europe, app usage was 72% during the pandemic, while in the US, the top seven digital banks grew their user base by 39% collectively. The global e-commerce boom helped the fintechs that serve these ecosystems.

The trend continued in 2021 with record fintech IPOs: Nubank was valued at $41bn, Paytm at $14.5bn, and Paysafe at $9bn.

How did fintech survive the pandemic?

It sounds strange to talk about a recession causing the fintech industry to flourish, but there’s a pretty simple explanation.

When the entire world stopped, our GDP collapsed, which caused a technical recession. Most governments stepped in with support packages, so there was little to no rise in unemployment. While production stopped, retail sales skyrocketed, and with people paid to stay at home, consumer spending increased. A lot.

It was an abrupt and short recession like none other before. But what we’re approaching right now looks a lot more like the gloomy recessions we’re used to. It’s predicted to last about as long as 2008 - five quarters.

The financial crisis is considered to be what gave birth to fintech.

How did fintech do then? Well, firstly there weren’t that many around - the financial crisis is considered to be what gave birth to fintech. The scene was set: people were losing their jobs, families were losing their homes, everyone was losing trust in the banks and the first iPhone was only a year old. The result was unprecedented global investment in financial technology which tripled between 2008 and 2013 from $930m to $2.97bn.

Where is fintech now?

Recent history proves that fintech thrives in times of crisis but 2022 has been a mixed bag. Rising interest rates and recession worries have caused venture investment to slow with funding having halved from the $40bn highs we saw at the end of 2021.

Fintechs have had nearly half a trillion dollars knocked off their cumulative peak valuation since the start of 2022. Buy Now Pay Later giant Klarna’s last funding round raised $6.7bn - an impressive figure but nonetheless down 85% on last year. PayPal shares dropped more than 60% this year. As of May, pandemic sweethearts Robinhood and Affirm have lost 87% and 81%, respectively, from their high.

It’s worth pointing out that fintech isn’t the only victim. High inflation has driven central banks to raise interest rates. The Nasdaq is down 28% this year, while the S&P 500 has seen a 19% drop.

VCs have told founders they need at least two years’ worth of ‘runway’ to endure a recession. Fintech is listening and taking action by aggressively reducing expenses - unfortunately, largely by cutting jobs. Klarna has already laid off 10% of its 7,000-person workforce (with rumours of more to come), Coinbase has already laid off 18%, and Robinhood 23%.

2021 was a year of unprecedented investment in Fintech, a trend that unfortunately hasn't continued through 2022. Despite this, there are those who remain enthusiastic with funds like a16z deciding to invest a further $4.5 billion in its crypto fund.

This period will separate the fintechs that are built to last from those that are not.

The future of fintech

This period will separate the fintechs that are built to last from those that are not. Most will try to change their strategy from targeting aggressive growth to achieving profitability with the looming recession likely to keep overinflated valuations and share prices down.

Needless to say, not all fintechs are the same. Those that have heavily relied on VC funding or have products not focused on solving real-world problems will undoubtedly struggle. Profitability, customer loyalty, and organic growth are the indicators for fintechs that will survive or even thrive during this tough period.

And who knows? Maybe fintech will surprise us again and take this as an opportunity to reinvent itself.

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 Catalina Munteanu
About the author

Catalina Munteanu

Catalina is our resident economist turned engineer, working with clients to identify gaps in the current capabilities and formulate strategies to improve and build upon existing strengths.