Listen to the Article: After the Fintech Funding Frenzy - How to Grasp the Industry Trends?

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The global fintech funding faced a sharp decline in 2022, as the technology sector suffered a widespread slump. Fintech companies raised only $63 billion throughout this year. The fourth quarter of 2022 was especially bleak, with just 599 rounds worth $8 billion, compared to 1,000 rounds worth $26 billion in the same period of 2021.

​The outlook for fintech funding became even more uncertain after Silicon Valley Bank, a major lender to tech startups, filed for bankruptcy in March 2023 amid a liquidity crunch and fraud allegations.

Fintech Funding Had A Good Time in the Past Few Years

Decades ago, technology companies and financial service institutions seemed to be two unrelated fields. With the rise of cryptocurrencies, fintech gradually became an innovative bridge that connects the two. Statistics suggest that there are about 30,000 fintech companies worldwide.

Fintechs attracted about 20% of global venture capital outlay since 2019, fueled by the speculative frenzy in the cryptocurrency and blockchain space. Together, 2021 and 2022 saw more than $50 billion in fundraising for cryptocurrencies, or roughly 75% of all crypto funding received through 2022.

Fintechs reached their peak in 2021, when they made up 9% of the valuation of all financial services companies globally, with a public valuation of $1.3 trillion, or 20 times their annual revenue.

April 2022 to April 2023: Decline

The fintech funding decline started around April 2022, with all segments and regions experiencing an average valuation drop of more than 60%, but the industry's revenue continued to grow, albeit at a slower pace. From April last year to April this year, new funding rounds decreased by about 43%, but venture capital funds continued to flow to some early-stage startups, while later-stage fintechs, especially those after C++ rounds, saw a sharp decline in rounds.

Specifically, the US fintechs raised $24 billion in 2022, down 31% year-on-year from $34.3 billion in 2021; the UK fintechs raised $10.2 billion in 2022, down 18% year-on-year from $12.4 billion in 2021; India's fintechs raised $3.6 billion in 2022, down 37% year-on-year from $5.7 billion in 2021.

The main factor behind the cooling of fintech funding is the persistent inflation that plagued the world last year. The global inflation scenario is quite complex, involving geopolitical tensions between Russia and Ukraine that broke out in 2022 and global supply chain crisis caused partly by China's harsh zero-Covid policy. In this period of increasing global economic instability, financial service institutions, fintechs and investors have all felt the change of the financial market landscape, and have shifted their focus to profit growth as the primary goal.

Is This A Short-Term Adjustment?

Some experts believe that this is only a short-term adjustment, and that the fundamentals of the fintech industry have remained unchanged, that this is essentially just a growing pain of the industry and market fit not being clear yet. Although in terms of fintech's profitability, less than half of the companies can achieve profitability.

Many fintechs are trying to cope with the current funding winter by focusing on unit economics rather than revenue growth at all costs. Moreover, the fintech market still has ample growth room, especially in emerging markets such as MENA and Southeast Asia. Today, there are still 1.5 billion adults who are unbanked and 2.8 billion underbanked.

On the other hand, emerging technologies such as generative artificial intelligence (e.g. GPT-4), API-based open connectivity, distributed ledger technology (DLT), quantum and edge computing have not yet shown their impact on the industry. The reason is that these technologies are either just entering the field or are still establishing their presence in it, but many of them will not only affect the participants in the financial services industry in the future, but will also have a huge impact on the entire human society.