Industry Landscape Shifting In 2023

Q&A With Nabil Kabbani

How do you see the industry landscape shifting in 2023? 

Investment in fintech has decreased significantly. Total fintech funding reached $75.2bn, down 46% in 2022. More notably Q4 funding was less than 25% of the annual number at roughly $10bn, indicating a continuing decline. If you dig deeper in the number, a pattern appears around funding and company sizes: Unicorn “birth” is down over 85% (166 to 69) and mega-rounds are also down. Late-stage investing is also down considerably. This indicates that investors are more reluctant to fund companies that were massively burning cash by chasing growth OKRs yet had no plan to become profitable. Many companies will struggle with this change causing a paradigm shift in go-to-market mentality. The mid-to-late stage companies that are likely to succeed are those that can demonstrate a clear path to profitability, and can efficiently run their operations on reasonable expense budgets. Alternatively, exceptionally innovative ideas that create attractive client benefits will be rewarded by the market as has been indicated with increases in early-stage funding.

Overall, investments are gravitating toward companies with better business models and better financial prospects. Basic technology-driven innovation has become commoditized, so what is becoming more valuable is access to markets. Building a payment system, a connector, or a wallet is no longer a breakthrough innovation, it’s all about the features it contains, how it is marketed, and what kind of access to customers the company has. Some companies are building specialized tools, while others are exploring new markets such as FinTech in agriculture, or even going to new markets like Africa to find untapped opportunities. It will be expensive to acquire customers if you are generically targeting the US mass market for Gen Z and Millennials without a unique value proposition.

How do you see B2B payments changing vs B2C payments in 2023?

There is a growing interest in b2b payments because it offers higher Average Revenue per User (ARPU) and several ancillary product opportunities. The largest area that received funding in 2022 is Payments tech, almost double the money going into banking or digital lending. Currently, the process of making payments between businesses can be costly and time-consuming. Many companies still use manual methods like wires and checks, which are slow and inefficient. There is a lot of potential for companies to streamline payments and banking for businesses.

Business banking can be expensive, with high account fees and transaction charges, which can be a challenge for small businesses. However, there are new b2b banks and payments companies that are trying to make the process more efficient, by offering free or inexpensive payments. They are also developing new technologies like interfaces that automatically issue invoices and update accounting systems when payments are made.

B2b payments have a good outlook, but some companies may have made a mistake by offering free payments too early. As competition increases, they may struggle to generate enough revenue. However, there are other ways to earn revenue, like charging for banking fees, interchange fees, and additional services like integration with accounting software. It’s important for these companies to find ways to generate revenue and become profitable soon, as investors are unlikely to continue funding companies without a clear path to profitability.

How do you see this impacting Embedded Finance? 

Embedded finance is a promising field because it is flexible and allows for a variety of use cases. Companies that have reached a certain maturity stage will have to diversify their offering in order to keep their customers and increase profitability. Embedded finance can offer that, short of making acquisitions. It can be used in multiple ways with layered technology stacks, and can be integrated into different offerings in b2c or b2b payment companies. Even within one product offering there can be several layers of services that can be invoked. For example, in a lending use case, it could be used to interface with a lender, support account tracking and interest calculations, underwrite risk, and/or track financing and sources of funds, or a combination of these elements. This provides flexibility for different forms of lending, such as consumer lending, p2p lending, and agricultural lending. It can also be used for online payments, giving  businesses the opportunity to expand their services and generate more revenue.

Businesses that specialize in specific areas such as business payments can benefit from embedded finance by “renting” a solution rather than building one for a faster go-to-market approach and to enable various tests. This allows them to focus on what they do best and acquire customers while adding a lending solution to their services. So they can launch a proof of concept then have the option to later shift to their own solution partially or fully once the volume justifies it.

What do you think should be the main focus for Fintechs in 2023?

It’s important for FinTech companies to have a clear business model and a unique value proposition to attract customers. A plain vanilla FinTech product may not be enough to survive in a crowded market. Companies can either provide a specialized tool that appeals to a niche market, or they can have a unique competitive advantage in reaching a niche market through affinity, channel partnerships, or sponsoring programs. It’s also important for companies to have a cost-effective customer acquisition strategy and a realistic go-to-market plan.

In order to be profitable, companies need to have a focus on running a tight ship and have a clear path to profitability. This will help them attract investors to fund their business. Companies should also be exploring innovative ways to improve their products and services. I think AI and ML are going to create breakthroughs in the industry whether it is on the risk and compliance side, or the customer behavior and ability to place product side. Additionally, companies should also have a clear plan for how they will generate revenue, whether it’s through charging for services, providing additional value, or offering ancillary products. Companies can expand their offering and revenue-generating abilities, while keeping costs low, by outsourcing new products and systems to white-label third parties. The resulting speed to market, efficiency gains, and expertise-for-hire can quickly solve the revenue/cost equation for many companies. Conversely, those that choose to “own everything” and develop in-house face a long roadmap of leanings and experimentations that may prove too costly to keep investors engaged. Without a clear path to profitability and a focus on innovation, it may be difficult for companies to survive in the competitive FinTech market.

What is your biggest takeaway from 2022 in the industry?

It’s clear that markets can shift quickly, as we’ve seen with the recent shift in investor sentiment towards FinTech companies. Many companies that were burning cash and had no clear path to profitability are no longer receiving funding. This is unfair, as some fintechs have been given a very short runway to prove their model, while social media companies have been given a decade to figure out their business model. Investors should be more patient and selective in their investments. Despite this, it’s important for companies to have a solid business plan that includes a path to profitability, as the markets can change unexpectedly and funding may not always be available. The picture is not as dark as some of the numbers suggest. We are still at a higher level of funding than 2018 in Q4 and deal numbers are only down single digits and holding at 2020 levels; a healthy deal volume. The US is still the strongest market by far, exceeding Europe by almost 30% in deal numbers and amounts, and dwarfing Latam/Carib with roughly $4bn and 342 deals in Q$ in the US vs $0.6bn and 70 deals in Latam/Carib (Africa is less than half that size). We do expect a market comeback with investors being more selective about which deals they back and possibly looking at the global south as an area that has been so far underinvested. Over half the top 10 equity deals in Q4 2022 went outside the US, and 60% of Seed VC funding happened outside the US with 50% going to the Global South, indicating increased investor interest in these markets. Another positive trend for innovation is that 68% of deals were funded in early stage, the highest in the last 4-5 years. This is positive for innovators, but again I think investors will be selective about which ideas they back.