It’s been a bruising stretch for financial tech companies, and as anyone in the industry knows, when something happens in FinTech, it has big ramifications that affect other companies as well.
The rise of FinTech companies disrupted traditional financial institutions, but with the current economic climate, FinTech multiples have fallen dramatically — as one recent TechCrunch article wrote “We are close to peak pessimism around FinTech.” There are a lot of reasons for this decrease in the valuation of FinTech companies, including rising interest rates and increased competition within the FinTech industry. But for tech leaders, it’s less about the why than the what — as in what to do about it.
Because of their lower valuations, FinTech companies are under even more pressure than before to make strategic tech decisions to remain competitive and retain their market share. In the past, many FinTech companies had the luxury of trying to create multiple new products — some safe bets, and some more audacious ideas that were higher-risk with potentially higher-returns. However, with the fall in multiples, companies are now understandably more cautious about investing in less proven ideas; many are looking for safer short-term investments that will have a more immediate, direct impact on the bottom line.
Many FinTech companies were also used to operating in the red for the first several years to gain market share, but with venture-capital investment slowing dramatically, companies are being forced to rethink the grow-at-any-cost mentality to make sure they either get profitable faster or dramatically slow their cash burn.
Becoming more efficient and betting on the hot trends
FinTech leaders are responding to current market environment by cutting the fat to become more efficient, and trying to get behind the winning trends. These companies are focusing on things like the cost-efficiency benefits of automation, along with the “safe bets and hot areas” like artificial intelligence and ever more frictionless payments.
You’re almost always stronger working together with a friend. So it’s not surprising that tech companies are now working hard to bolster valuations by building partnerships and collaborating with both each other and with traditional financial institutions. Sure, in the past, many FinTech companies focused on disrupting traditional financial institutions and gaining market share from them — and we certainly still see some of that. But FinTech executives increasingly sees value in these more established institutions, along with a chance to leverage their customer base and increase revenue streams.
Diversification in FinTech
Eggs, meet new baskets. One time-tested way to shore up defenses against potential downfalls in one revenue stream is by expanding into new markets and developing new products and services. FinTech companies nowadays want to reduce their reliance on a single product or service. We’re seeing more companies looking to diversify their client base beyond a single industry to make sure they’re drawing in customers from multiple verticals and geographies (especially more recession-proof areas).
Markets are cyclical, and FinTech multiples will recover. But as the industry continues to evolve, we’ll continue to see significant changes in the way FinTech companies approach their tech decisions. The best ones will remember the lessons they learned during the lean times even when the market’s more bullish than ever again.