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The writer is chief executive of Fidelity International
It would be easy to sympathise with Henry Kissinger when he joked: “There can’t be a crisis next week, my schedule is already full.” Stresses in the banking sector and the “shotgun weddings” of lenders such as First Republic have added a layer of volatility to an already challenging economic and financial outlook.
For some, it might revive bad memories of the turbulence of 2008. But the years after the financial crisis saw a positive burst of creativity in the fintech sector, and the application of a start-up ethos to financial problems. It was spurred on by changing consumer behaviour, advances in technology and connectivity and by ultra-low interest rates.
Any change of environment brings a change of mood and the current one is no different. The rapid tightening of financial conditions after years of relative stability and cheap funding is leading to a sense of concern in the fintech industry.
While economic cycles may come and go, this one has the potential to be particularly challenging for those firms that rely on funding from private investors, who are themselves under greater pressure to produce returns as exit opportunities and valuations wane.
Private company financing in the fintech sector dropped by about two-thirds year on year in the fourth quarter of 2022, according to Financial Technology Partners. That figure ticked up in the first quarter of this year, but a big chunk of that was due to Stripe’s $6.5bn funding round at a $50bn valuation, 47 per cent below its high set in 2021. The actual number of financing rounds also picked to 794 deals in the first quarter from 681 deals in the last three months of 2022, according to the FTP data. But that still remained below the heightened levels reached in 2021 and early 2022.
Fintech firms now operate in a more competitive environment than before, and the fight for both cost-conscious clients and increasingly wary investors will intensify. That will force many firms to focus on survival in the immediate future, and a faster path to profitability, rather than growth at any price.
The sudden change in market environment might, for some founders, feel like sailing into a storm in shark-infested waters. To maximise the chances of survival, they need three things: a well-drilled crew in a seaworthy boat, enough life jackets for everyone on board and, just in case all that fails, the ability to swim fast to the shore. Or, in other words: risk mitigation, contingency planning and agility. Having all three will greatly improve the chances of making it to calmer waters.
Mitigation strategies can come in the form of diversified products or services, as well as carefully managed finances. Contingency, meanwhile, takes a fair bit of imagination. It involves monitoring and prioritising potential existential risks and developing response plans that can be activated at short notice when needed.
Of all these factors, however, it is agility — or the capacity to change tack and seize on new business models, product offerings and funding opportunities — that will make the difference for fintech firms. With high competition for diminishing sources of revenue and investment, and the difficulty of diversifying both at a small company, the incentive to make quick strategic changes increases.
It also helps to think about the when, how and what to communicate as part of changing a business. Managing it to make sure that there’s the right balance of urgency and reassurance, is crucial.
Long-term survival is often underrated as a business objective but without it, all other strategic aims are moot. It is especially important in a difficult and fast-moving environment where the rate of change seems to be accelerating.
While this downturn may be the first experienced by younger firms, the recent crisis in banking in the US and Europe is unlikely to be the last — and as Kissinger pointed out, a crisis never seems to occur at a convenient moment. So it is the ability of an organisation to keep showing up, day after day, no matter the external conditions, that forms the basis for any future prosperity.
For fintech firms, the speed of decision-making to improve client and funding market fit, and the ability to implement those changes quickly and effectively, may start to separate those that make it through the cycle intact, and those that don’t.
The rewards on offer will be large. The survivors in the fintech industry will find themselves in a market with fewer competitors — outswimming the other swimmers is sometimes more important than trying to outswim the shark.