The global fintech market has witnessed a dramatic slowdown over the past few years, with valuations and capital raising falling rapidly. In fact, a new white paper from the World Economic Forum and McKinsey reports that venture investment for the sector has fallen by 67%, from a peak of $92 billion in 2021 to $30 billion in 2023.
Economic headwinds have prompted dozens of fintech companies to lay off staff, cut costs and raise cash, and the industry has found itself losing out to artificial intelligence (AI) startups, which are attracting a growing share of investor capital. .
The industry has also suffered from self-inflicted wounds. Both the FTX crypto meltdown and the more recent Synapse implosion, in which consumers were unable to access their money for months, significantly damaged the industry’s reputation with regulators and undermined consumer confidence.
Fintech loses its lead
How can fintech get its mojo back? The answer lies in returning to its roots. The initial promise of fintech had a lot to do with improving people’s financial lives by increasing access, reducing costs and solving real pain points. In many ways, the industry has delivered.
Prepaid debit cards and digital payment platforms have made it cheaper and easier to pay, receive government benefits and pay bills in real time. Consumers now have more ways to access and establish credit than ever before, with lenders regularly improving underwriting methodologies to make better, more comprehensive decisions. Automated savings tools have made it easier for consumers to build a financial cushion, and major employers are adding emergency savings solutions to the list of employee benefits. Many workers can also access their paychecks before payday, a huge advantage for those who live paycheck to paycheck.
Unfortunately for fintechs, the unintended consequence of these innovations has been increased competition in the market. Advances from fintechs and the resulting adoption by consumers have prompted banks and credit unions to invest in modernizing their systems and improving their offerings—to the point now where they are beating fintechs at their own game.
Four years ago, JD Power began measuring the financial health of customers of the largest US banks and asked them to rate whether their bank does a good job of helping them improve their financial health. Large banks can now be certified by JD Power to have an effective financial health strategy. And earlier this summer, the OCC encouraged banks to begin assessing their customers’ financial “vital signs,” using transaction data to look at simple measures of cash flow, liquidity and debt.
With big banks embracing the financial health movement at a time when fintech is faltering and suffering from reputational damage, fintech is now on the outside looking in. To change this dynamic, fintech leaders must follow the lead of banks and credit unions and double down on financial health.
Financial health as a competitive advantage
The first step is to create a new set of goals for defining success, a process that starts with fintech investors. The goal in fintech used to be growth at all costs, regardless of customer outcomes. When companies pursued business models that could not grow profitably, consumers paid the price through high fees and poor practices.
Now, changing customer attitudes, regulatory action and improvements by the biggest financial players have given tips and unwanted fees a dirty word. Business models must adapt. A more balanced approach is to pursue profitable growth that also nurtures the client’s financial health. This consistent position aligns business and customer goals and better enables fintechs to thrive in any environment.
Importantly, this does not mean that financial services should be free. Businesses that create positive financial health outcomes will deliver tangible value that customers will pay for. There is no shortage of financial pain points waiting to be resolved.
The solution to fintech’s problems is not just about products. Customer experience also matters. Technology is only cool when it works. No one wants to get stuck in a chatbot doom loop, especially when it comes to money matters. Having a clear understanding of where clients are starting their financial health journey and how to help them progress is essential. In fact, many fintechs have an advantage over big banks in that they are better able to identify and then serve the unique needs of niche markets.
Fintechs must also measure the financial health of their customers – because what gets measured gets managed. There are many ways to measure—surveying customers, analyzing administrative data—and a variety of tools that can help. Regardless of how measurement is done, it is essential to disaggregate data by gender, race and ethnicity, and other important dimensions to understand differences between groups. The goal is not financial health for some. The goal is financial health for everyone.
A more profitable and humane future
Looking ahead, there are reasons for optimism. If the technological revolution of the last 20 years was built on the Internet and the smartphone, then the next revolution will be shaped by open banking and generative AI. Federal regulators’ codification of open banking will spur product and service innovation and further increase market competition. Combined with the power of generative artificial intelligence to provide real-time guidance, the next era of the technology revolution has the potential to put consumers firmly in the driver’s seat of their financial lives.
The fintech industry may be poised to thrive in this brave new world if it can regain its footing. By reconnecting with its original mission of improving consumers’ financial lives, the industry will be poised to turn fintech winter into spring.