After a period of immense growth in the Fintech industry, things have settled down. That’s the optimistic way of putting it, at least. For some companies, the reality is that 2022 has brought them crashing back down to Earth.
This has been true of tech companies in the financial services industry across the board. Even the best online brokerage firms are struggling to keep their heads above the water. If we truly are heading into a recession, many companies could find it incredibly hard to stay afloat.
But why is this the case? What happened to make 2021 such a great year for Fintech companies and how did that set them up for failure in 2022? Here’s what you need to know.
The Success Story of 2021
Economies around the world bounced back after the recession caused by the pandemic. This happened in all industries, but no industry was as perfectly positioned to take advantage of the rebound as the Fintech industry. Financial services are needed by everybody, and people started moving online faster than ever before.
The fact is that traditional banking had overstayed its welcome long before 2020. However, in matters that are as sensitive as personal finance, people are reluctant to embrace change. Fintech companies offered convenience, but they had not earned the trust of many, especially in the older generations.
The pandemic changed that, as people of all ages learned to embrace technology in every area of their lives.
This led to a boom in the Fintech industry. Existing companies saw an influx of new customers. A wealth of new companies got their first big rounds of funding. The outlook was incredible. 2022 turned out to be a massive wet blanket.
2022: What Happened?
Towards the end of 2021, inflation started to become a real problem. Costs were rising, leading to concern among consumers. However, higher interest rates were supposed to bring balance back to the economy.
A number of factors in 2022, many of which were triggered by Russia’s invasion of Ukraine and consequent sanctions, only made inflation worse. Supply chains broke down and delays in all industries became unavoidable. Individuals and businesses struggled to keep up.
This has led to fears of a massive recession. Some experts believe we are already in a recession. Recessions are particularly bad for industries that have just experienced a boom.
Why Fintech?
The problem is that during a boom, companies that would otherwise never have gotten off the ground receive financing. These companies may not provide an important product or service, but enough people choose to use what they are offering when money is flowing. When the money stops flowing, these products and services are the first to go.
Just about every tech-savvy person in 2022 has a number of Fintech apps on their phone that they never open. It is these kinds of services that seemed unique and useful a year ago but no longer justify their existence.
But why has this hit Fintech companies so hard? Well, Fintech products and services are useful only when there is cash flow. When you’re making a lot of payments, payment apps are great. When you’re investing money, investment platforms are necessary.
However, what happens to these services when people are saving money? All of a sudden, they have no use for services which facilitate its movement. With money sitting in savings accounts, these services become redundant.
This is especially true for companies that don’t offer a vital service. But it also applies to companies offering services that are much needed by the public. During the boom, many new startups began offering some variation of these products and services. The market became somewhat saturated, which was fine in 2021. With cash flow problems in 2022, the money that is moving is not enough to maintain every one of these companies.
Will Fintech Recover?
For the Fintech industry, the reality is that it will always be needed. People will start using these companies again when finances improve. Many companies will also find ways of adapting to provide products that are worthwhile in a recession.
That said, many of the more redundant companies may not get a second chance. Investors will be wary of funding ventures which have no real purpose other than to make some cash.
It remains to be seen whether we will enter a true recession. If we do, many Fintech companies which are already struggling might find themselves in deep trouble.