Fintech companies must find new revenue streams if they want to thrive in the current market
The global fintech industry has been buffeted by market headwinds in the last two years, with high inflation, volatile valuations and macroeconomic uncertainty inhibiting investor appetite in the still-young sector. Though the industry prospered during the pandemic, thanks to heightened demand and the availability of cheap money, many business models proved unsustainable following the steep rate hikes that began in 2022.
The collapse of Silicon Valley Bank in March 2023 further destabilized the industry, with tech valuations plummeting and funding drying up. Hostile market conditions led to several high-profile fintech startup failures. US-based payments provider Plastiq is one example, filing for bankruptcy in May 2023 as a direct result of the collapse of SVB, its primary bank. In the UK, digital bank Atom saw its valuation fall from £435 million at the start of 2022—when the Durham-based fintech had plans to go public in a year’s time—to £362 million following a £100 million funding round in November 2023.
Across key fintech markets in the US and Europe, challenging conditions have undermined investor confidence. Global investment in the industry fell dramatically to US$51 billion in 2023, a 48 percent decline from the US$99 billion recorded the previous year.
Payment platforms secure funding
Despite these headwinds, there are pockets of growth in the industry. Notably, payment platforms were responsible for three of five largest capital raises in 2023, according to industry body Innovate Finance.
The largest of these was Stripe’s US$6.5 billion fundraise, announced in March 2023, which left the US payments company with a new valuation of US$50 billion. This is down nearly 50 percent from its US$95 billion valuation peak of 2021, and emblematic of the tough fundraising environment for tech startups.
Another large fundraise of 2023 saw Israeli fintech unicorn Rapyd secure US$700 million. Rapyd is a fintech-as-a-service platform, providing application programming interfaces to multinational clients such as Meta, Netflix, Ikea and Uber. The startup used the funds to acquire payment solutions provider PayU GPO from Dutch technology investment group Prosus for US$610 million, greatly bolstering Rapyd’s global presence.
The deal highlights how some fintechs are encouraged to pursue M&A within the current market. At the time of the deal, Rapyd CEO Arik Shtilman announced his intention to take advantage of the market downturn by carrying out additional acquisitions.
Neobanks pivot for growth
M&A is also becoming a more attractive prospect for neobanks seeking out new revenue streams. Speculation in summer 2023 that UK challenger bank Monzo was planning to acquire Danish peer Luna attracted substantial market interest. Some analysts forecasted a wave of M&A among neobanks.
While neither the deal nor the predicted M&A frenzy materialized, some significant transactions were announced. In July 2023, Turkish neobank Papara acquired Madrid-based rival Rebellion for an undisclosed sum. The deal, which gave Papara unicorn status, signals the neobank’s intention to expand outside its home market. With the second-highest neobank usage in Europe, Spain offers an especially attractive growth opportunity for Papara.
Elsewhere, neobanks with attractive growth prospects continue to hunt for funding as they await the revival of IPO markets. For instance, UK startup Zopa announced a US$93 million fundraise led by US venture capital firm IAG Silverstripe in January 2023, as it looks to expand its financial offerings and make acquisitions. Eight months later, Zopa raised another US$93 million in a debt fundraise led by the same backer, pushing its fundraising to date to £530 million.
Neobanks that are unable to secure growth, whether organically or through acquisitions, are likely to be targeted by larger incumbents. Traditional banks, which are increasingly relying on digital distribution, artificial intelligence and automation, have ample motivation to snap up smaller fintech companies. This could result in more “plug and play” acquisitions of fintechs as big banks look to stay ahead of the competition and follow through on ambitious digital transformation strategies.
Latin America primed for investment rebound
Though the US and Europe attract the lion’s share of attention, other markets are showing similar trends in their blossoming fintech sectors. Latin America in particular is a hotbed for fintech innovation, with 2024 expected to mark a return to stronger capital investment after a couple of sluggish years.
In 2021, Latin America was the fastest-growing region in the world for venture and technology funding, according to Crunchbase. However, the rapid decline in investment globally in 2022 and 2023 did not leave Latin America unscathed: The estimated US$2.9 billion of seed capital accrued last year represented an 84 percent decline from 2021. But fintech players expect helpful tailwinds this year, thanks to falling inflation, interest rate cuts and an abundance of growth opportunities.
There is already evidence of a return to dealmaking in 2024. In January, Uruguay-headquartered Prometeo received US$13 million in fresh backing from existing and new investors, including PayPal and Samsung, attracted to the company’s open banking platform, which currently operates across ten Latin American countries. A couple of days later, Argentina-based payments infrastructure provider Pomelo secured US$40 million from a group of regional and international venture capital investors. The company, founded in 2021, already has strategic alliances in place with Visa and Mastercard and intends to double the size of its business this year.
Perhaps the best-known Latin American fintech is Nubank, the Brazilian digital lender whose lofty ambitions speak to the promise of this regional market. Carrying a valuation of US$44 billion, Nubank expects to record US$1 billion in annual profits in 2024, which would make it the first Western neobank to reach that goal.
What comes next?
There are plenty of obstacles the fintech industry must overcome on its road to recovery. Developing new revenue streams will be crucial to future resilience. For those with the financial capacity, M&A is a logical step to expand market presence and achieve growth.
There are signs, fortunately, that the global fundraising environment may be approaching a turning point. Though key central banks held interest rates steady at their most recent meetings, there are indications that the Federal Reserve and European Central Bank will begin cutting rates later this year. This will provide welcome relief for dealmakers looking to secure funding.
In fact, several fintech unicorns are expected to raise large funds this year. Sifted, the European startup news site, believes German neobank N26 and French banking app Lydia, both of which last raised funds in late 2021, could be due to tap investors again soon.
Once interest rates begin to normalize, dealmakers eyeing up the fintech space will have reason to be more confident. Yet with investors becoming more selective, only companies with watertight business models will survive the market shake-up. With the era of cheap debt well behind us, the impetus is now on fintechs to deliver sustainable, profitable growth.
