The global fintech market has witnessed a dramatic slowdown over the last few years, with both valuations and capital raises dropping precipitously. In fact, a new white paper from the World Economic Forum and McKinsey reports that venture investments for the sector have fallen 67%, from a peak of $92 billion in 2021 to $30 billion in 2023.
Economic headwinds have driven dozens of fintech companies to lay off staff, cut expenses, and hoard 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 implosion of Synapse, in which consumers have been unable to access their money for months, significantly damaged the industry’s reputation with regulators and undermined consumer trust.
Fintech Loses Its Lead
How can fintech get its mojo back? The answer lies in a return to its roots. The original promise of fintech was very much about 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 get paid, receive government benefits, and pay bills in real-time. Consumers now have more ways to access and build credit than ever before, with lenders regularly improving underwriting methodologies to make better, more inclusive decisions. Automated savings tools have made it easier for consumers to build a financial cushion, and major employers are adding emergency savings solutions to their roster of employee benefits. Many workers can also access their wages ahead of payday, a huge advantage for those living paycheck to paycheck.
Unfortunately for fintechs, the unintended consequence of these innovations has been increased market competition. The advancements by fintechs and the resulting consumer adoption has spurred banks and credit unions to invest in modernizing their systems and improve 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 the customers of the largest US banks and asking them to assess whether their bank does a good job in helping them improve their financial health. Big banks can now get certified by JD Power for having an effective financial health strategy. And earlier this summer, the OCC encouraged banks to begin assessing their customers’ financial “vital signs”, using transactional data to look at simple measures of cash flow, liquidity, and debt.
With the 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 reverse this dynamic, fintech leaders should follow the lead of banks and credit unions and double down on financial health.
Financial Health as a Competitive Edge
The first step is to establish a new set of goalposts for defining success, a process that begins with fintech investors. The goal in fintech used to be growth at all costs, regardless of customer outcomes. When companies pursued business models that couldn’t profitably scale, consumers paid the price through high fees and shoddy practices.
Now, changing customer attitudes, regulatory action, and improvements by larger financial players have made tipping and junk fees dirty words. Business models must adapt. A more balanced approach is to pursue profitable growth that also fuels customer financial health. This sustainable position aligns business and customer goals and better enables fintechs to thrive in any environment.
Importantly, this does not mean financial services have to 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 solved.
The solution to fintech’s woes is not just about products. The customer experience matters too. Technology is only cool when it works. No one wants to get stuck in a chatbot doom loop, especially when they are dealing with money issues. Having a clear understanding of where customers are starting their financial health journey and how to help them progress is key. In fact, many fintechs have an advantage over large 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 accomplished, it’s critical to disaggregate the data by gender, by race and ethnicity, and by other important dimensions to understand differences across groups. The goal isn’t financial health for some. The goal is financial health for all.
A More Profitable and Humane Future
Looking ahead, there is reason 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. The codification of open banking by federal regulators will foster product and service innovation and further enhance market competition. Combined with the power of generative AI to provide real-time guidance, the next era of the technological revolution has the potential to put consumers firmly in the driver’s seat of their financial lives.
The fintech industry could be poised to prosper 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 primed to turn the fintech winter into spring.
