The impacts of ongoing market uncertainty can be felt across all sectors. But in a contracting economy, FinTech is the new kid on the block and in the unique position of facing significant economic headwinds for the first time in its relatively short existence. We interviewed BPM Partner and Co-Leader of Financial Services James Lichau about what’s happening in the FinTech landscape now, and what we can expect in the year ahead.
With high inflation, volatile markets and ongoing geopolitical uncertainty, 2022 has proven to be a challenging year throughout the economy and across all industries. Although many FinTech organizations haven’t yet acutely felt the impacts of higher interest rates or slowing growth, they are likely coming in 2023, a year that is expected to bring continued economic challenges — and the possibility of a recession.
We spoke with James, who specializes in guiding FinTech companies on their growth trajectory, on where things stand today as we approach the end of 2022, and how to prepare for 2023.
How do you see rising interest rates impacting FinTech organizations in the year ahead?
FinTech lenders could soon be impacted by rising interest rates because their loans will potentially be less valuable as they look to sell them in the market. Access and the cost of capital as interest rates rise may also become a significant challenge for FinTechs that leverage their lending.
Options to address the situation include seasoning the loans on the books for longer than planned before selling them or turning to different types of derivatives or related products to help hedge interest rate risk. We might see FinTech lenders pivoting their business models to offload their loans at origination, rather than using the leverage and season model the industry has seen for several years now. Each of these routes has tax planning and audit impacts to carefully consider.
What’s ahead for the FinTech mergers and acquisition (M&A) space in 2023?
We expect ongoing market volatility into 2023 and more interest rate hikes ahead as the Fed seeks to curb high inflation. These forces are expected to drive down company valuations across all industries, including FinTech. Lower valuations could spur interest from potential buyers looking to purchase promising companies at an attractive purchase price. As a result, we could see an uptick in M&A activity in 2023. For FinTech companies looking to sell in this environment, it is important that they keep in mind that they may not sell at the valuation they had once envisioned in better economic times.
What funding options do FinTech companies have in this environment?
With valuations down and interest rates high, raising capital is expected to become increasingly challenging in the year ahead. Additionally, slumps in both public and private markets have significantly slowed IPO and SPAC transactions.
Despite these challenges, FinTech companies will still need to present a clear path to profitability — even in the current environment. Scaling operations remains critical, especially if the FinTech company is in its early stages. Companies not able to fundraise risk being consolidated or in a position to possibly restructure operations to extend runways with current capital resources.
Options to consider in this landscape include streamlining business models, freezing new hires, downsizing, or even disposing of business segments and product lines.
Above all, it’s critical to remain open and transparent with investors, auditors and other stakeholders, even if the news isn’t great. How you navigate times of challenge can help you build trust across your ecosystem. Those who survive these economic conditions will likely emerge even stronger.
How BPM can help
We have the resources, knowledge, and experience you need in these volatile times. Contact us to discuss your next steps today.