The recent slowdown in venture capital (VC) investment, coupled with increased regulatory scrutiny, has created a more complex landscape for fintech founders and investors. But despite these challenges, opportunities still exist in the sector as demand for regtech, embedded finance and artificial intelligence (AI) rises, and as adoption of blockchain networks continues to progress, a new report by Silicon Valley Bank (SVB) says.
The report, titled “The Future of Fintech ”, provides an outlook on innovation in the fintech industry based on the bank’s proprietary data and sector knowledge, highlighting how fintech companies are finding opportunities regardless of obstacles challenging their growth.
According to the report, regulators in the US are increasing their oversight of fintech platforms that have emerged in the past decade, a regulatory catch-up that encompasses risks and concerns ranging from data privacy and fair lending to digital assets.
At the same time, the financial sector is experiencing a growing trend of fraud, impacting companies’ bottom lines. A 2023 survey commissioned by regtech firm Alloy revealed that as many as 60% of fintech companies paid at least US$250,000 in compliance fines and penalties in 2022.
The study also found that larger organizations were experiencing the highest losses due to compliance, with 37% of 1,000+ employee organizations indicating paying between US$500,001 and US$1 million in fines and penalties in 2022.
Against this backdrop, fintech startups are embracing automation, including through the use of AI, to better detect fraud. According to the same Alloy survey, 56% of the fintech companies polled were already using AI for compliance and another 29% are considering it.
The traditional financial sector is also jumping on the bandwagon. A 2020/2021 industry study conducted by the European Banking Authority revealed that a considerable number of financial institutions already had advanced experience of regtech solutions and services at the time. The study, which polled a total of 115 financial institutions and 147 regtech providers across the European Union (EU), found that more than half of regtech projects were already in the production stage.
In the fields of anti-money laundering and countering the financing of terrorism (AML/CFT), the study found that the share of fraud prevention and information and communication technology (ICT) in production was even higher, standing above 60% of regtech solutions.
Further showcasing the surge in regtech adoption, the study revealed that although for half of the surveyed financial institutions, investment and spending on regtech solutions stood below 20% of the overall IT budget in 2020, a handful of institutions showed significant reliance on regtech, with up to 40%‐60% of the total IT budget going into the operations of regtech solutions.
Beside sustained demand for regtech solutions, the SVB report notes that in the payment vertical, established firms managed to secure substantial rounds of funding this year despite the challenging fundraising environment, a trend which reflects investors’ strong confidence in the payment and embedded finance sector, particularly due to the continued growth of digital payments.
American digital payment firm Stripe secured a significant US$6.9 billion funding round in March, marking one of the largest VC tech rounds ever. The payments app was valued at US$50 billion, a far cry from US$95 billion in 2021, but still good enough to maintain its position as the second most valuable US unicorn after SpaceX.
This comes amid surging usage of digital payments surged during COVID-19 and after. A 2022 survey conducted by American global payment firm NMI polled a thousand consumers in the US and found that 69% of respondents had made a contactless payment that year. In 2020, only 22% had used contactless payments.
Tap-to-pay technology is also on the rise, and embedded finance transactions, including embedded banking, lending and insurance, are expected to top US$7 trillion by 2026.
Like other fintech companies, Stripe faced macro headwinds this past year, laying off 14% of workers in November 2022. But towards the end of 2023, business rebounded with revenue growth improving 35% in Q3 2023 from 25% for all of 2022, the Information reported. Stripe posted an operating profit of US$150 million in the third quarter alone, bringing company’s total profit for the first three quarters of 2023 to US$200 million.
Finally, the last fintech vertical outlined in the SVB report is the blockchain segment. The report notes that while 2022 and 2023 were challenging years for the industry, marked by slumping prices and high-profile collapses, positive indicators are suggesting ongoing development activity.
The number of daily active wallets and weekly developers continue to stand above 2021 levels, reaching 1.14 million and 7,700 in 2023, respectively, the report notes. The figures are below the record-breaking levels recorded in 2022 but surpass the 2021 numbers of 1.09 million and 7,000, respectively.
According to SVB, these metrics suggest the possibility of entering a new, long-term growth cycle in the sector, presenting opportunities for new innovations in blockchain as adoption increases over time.
Following global trends, fintech VC fundraising activity in the US declined substantially this year, with a stated interest in fintech plunging nearly 70% and aggregate fundraising dollars falling at a similar rate.
Regardless, VC firms are still actively raising capital, with Ribbit Capital securing US$800 million for Fund X in its first round, and corporates such as PayPal and Nationwide being in the process of raising fintech funds, the report notes.
