Does the threat of fintechs eating the lunch of banks still hold true? That doesn’t seem to be the case anymore, according to a recent report by Moody’s Investors Service, which sees tough times ahead for fintech firms globally. With higher interest rates drying up funding and incumbent financial firms forging ahead with their digital strategies, only the strongest fintechs are likely to survive in the coming years.
“Fintech momentum has slowed along with funding challenges and banks have upped their game in response to the fintech threat,” explains Stephen Tu, vice president and senior credit officer at Moody’s.
Banks “have enhanced their digital offerings and expanded their capabilities organically, through partnerships or acquisitions. Moreover, they have access to stable deposit funding given their well-established brands and customer relationships,” Tu adds.
According to KPMG’s annual Pulse of Fintech report, 2022 was a challenging year for fintech investment globally, with the Americas seeing a US$40 billion drop in investment compared to the high in 2021. Similarly, data from CB Insights show that the number of fintech funding deals has dropped to less than 1,000 in the fourth quarter of 2022, from around 1,500 in Q1 2022.
Other significant challenges for fintechs include rules requiring firms to improve their KYC (know your customer) and AML (anti-money laundering) processes. This has been more apparent for those in the cryptocurrency and BNPL (buy now, pay later) segments which previously were largely unregulated.
A recent survey of fintechs conducted by digital customer experience solutions provider TDCX finds that performing KYC checks was the top hurdle facing fintechs today, followed by monitoring/measuring quality of service, maintaining sufficient operating hours, and compliance with data privacy regulations.
“KYC has become a key focus for fintech companies. Not only is KYC essential for regulatory compliance, it is an unavoidable part of the customer onboarding process which will either lead to a seamless customer experience or a highly frustrating one,” shares Ricart Valvekens, chief client solutions officer at TDCX.
Despite the difficult conditions, Asia still appears to be a bright spot for fintech development at least on the funding side, with firms looking to capitalize on the region’s growth potential and relatively young population.
Asia-Pacific saw a record US$50.5 billion in fintech investment last year, up from US$50.2 billion in 2021, driven by the emergence of B2B digital solutions such as microlending, SME lending, and B2B payments, KPMG data reveal.
Though the overall sentiment in the fintech community is predicted to be weak in 2023, Moody’s believes firms with strong backing from large financial institutions will overcome the current hurdles.
“While a large number of nascent fintechs with weaker business models will disappear, a handful will survive and prove truly disruptive over time. In particular, fintechs that are part of larger conglomerates or serve a niche segment, such as Australia’s Judo Bank, Brazil’s Nubank, and Korea’s KakaoBank, are performing surprisingly well,” says Tu.
