In 2021, everyone was talking about a booming financial technology industry. It was a normal thought as the numbers were showing the global fintech funding surging to a record high of USD 131.5 billion across 4,969 deals – 21% of all venture capital (VC) funding during the year and substantially more than the USD 49 billion recorded in 2020 across 3,491 deals.
This success was, in part, due to the pandemic, as the consumers’ readiness to try new digital financial services grew rapidly, therefore leading to the increasing speed of innovation within the banking industry. Only the European market has seen a 72% increase in the use of financial apps and mobile banking services, proving the point that the fintech industry has become more and more powerful during the COVID-19 pandemic.
Therefore, it was only normal to expect that, as the world moves back to normal, fintech will remain one of the fastest-growing sectors. However, 2022 didn’t quite manage to keep up the pace, especially given the challenging global economic conditions that have emerged this year. Only in the first quarter, banking fintechs experienced a 48% drop in funding, down to USD 4.4 billion compared to the same period of last year.
There is no escaping the reality that funding conditions are much tougher this year across most of the world than in 2021. Target firms (startups and scale up) must demonstrate profitability and growth prospects more clearly before investors can trust their cause.
As expected, the global funding continued to slide down in the Q3 of 2022, to USD 74.5 billion. The global fintech funding alone dropped to USD 12.9 billion, explaining fintechs’ need to cut costs, scale back expansion plans, and prioritise profitability over customer growth. Naturally, there is still money out there for fintechs, but with most neobanks still unable to turn a profit, regulations coming for Buy Now, Pay Later (BNPL) services, and a chill falling over the cryptocurrency world, firms must stand out to attract investors.
Fintech investors have already become more discerning, focusing on profitability and cash flow when evaluation opportunities appear. In the current environment, a fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business.
In 2022, some fintech startups still managed to get growth-stage funding, while other innovative ideas have also been scaled. Fintechs that are resilient, determined to bring about a change, and resolute enough to make it through the ongoing market are likely to reap the benefits going ahead.
The third quarter’s two biggest funding rounds in the world were raised by European companies: Germany-based insurtech Wefox and Italy-based payments provider Satispay. Overall, USD 679 million poured into the insurtech sector across 28 funding rounds – while payments raked in USD 547 million, but across 39 rounds.
Although payments continue to be in the top-funded subsectors list, it’s also seen some of the biggest valuation casualties in the last few months – including Klarna’s 85% drop in July and SumUp falling short of its anticipated valuation by more than 50% in late June.
However, investors have mentioned they’re still on the lookout for companies both enabling and distributing next-generation financial products. They’re still confident in the success of platforms that are selling embeddable financial products such as payments, insurance, and lending. Beyond embeddable fintech products, investors are excited about companies that are disrupting traditional payment rails with more efficient models.
As BNPL has established itself as an accessible method of financing for a variety of purchases, particularly online, it also became a more popular POS option in 2022. Therefore, as its popularity continues to grow, investors in the space have already seen BNPL leaving the bounds of retail and entering sectors such as healthcare, housing, groceries, etc.
Following the trends, it is easy to see that B2B BNPL startups are on the rise, as the biggest challenge for these companies is underwriting the vast array of different types of businesses they aim to serve. One of the firms that prove this theory is the US-based fintech Ratio that managed to secure a USD 11 million venture funding and USD 400 million credit facility to augment B2B SaaS payments, financing, and pricing. The platform incorporates Ratio Boost, which is a BNPL payments, optimised pricing and checkout product embedded via API into the seller’s POS systems and processes; and Ratio Trade, a non-dilutive, upfront capital solution that is backed by the user’s portfolio of contracts.
Topi is another great example, succeeding to raise USD 45 million in equity and debt financing to provide hardware-as-a-service for B2B merchants who can choose to pay in instalments for necessary equipment. Topi’s product for hardware equipment rental could come in handy not only for startups looking to maintain a steady cash flow, but also for SMEs or established businesses that faced a hard time during the COVID-19 pandemic and the following worldwide economic crisis.
However, the popularity of consumer facing BNPL providers is still growing, as consumers are already increasing their credit utilisation – the share of US adults with a credit card balance climbed 5% points compared with a year ago – and will likely look for opportunities to manage that utilisation by diverting some purchases to BNPL.
Therefore, it is not surprising to still see interest from investors in this sector of activity. There were three funding rounds of USD 100 million or above in Q3 of 2022, with a few more below that sum. Most of the companies that raised the money plan to use it to expand to other markets, strengthen their products, and add new ones that could come in handy.
SeQura is one of the examples, gaining up to USD 150 million in financing from Citi to support its international expansion across Southern Europe and to develop and launch new payment solutions. Having the same final goals, Tamara, a Saudi Arabia-based BNPL firm, raised USD 100 million in a second round of fundraising from investors including Sanabil Investments.
Splitit on the other hand plans to use the USD 10.5 million funding to grow its Instalment-as-a-Service project expansion and to enlarge its list of global enterprise merchants and strategic partners, while ATOME Financial has entered into a USD 100 million debt facility with HSBC Singapore to boost its flexible deferred payments business across Asia.
It’s still difficult to predict what’s going to happen next, but now that retailers are supportive of the rise of BNPL apps and consumers have gotten comfortable with the concept, there’s still more ground for BNPL to expand and explore.
VC investments in embedded finance have more than doubled from 2020 to 2021 in Europe and North America to reach a total of USD 6.7 billion, as embedded finance is spawning new opportunities for traditional banks and non-financial services organisations alike.
The digital marketplace is fuelled by the same economic principle of supply and demand, a principle that applies to embedded finance as well. Therefore, it should be no surprise that a report by Yobota has shown that 44% of banking and financial institutions plan to invest in embedded finance solutions this year.
The growing trend can be easily seen through the Q3 investments as well. One of the most convincing examples for this quarter seems to be Moneyflow, an FSA-approved Danish fintech company providing funding solutions for businesses through embedded finance, which has raised USD 248 million in asset-backed debt funding from Aion Bank, to fuel the growth of its platform by expanding its B2B Pay Later embedded finance offering for SMEs.
Embedded finance has typically been one of the more bullish areas of the financial services market, so much so that even current research that factors in the state of the market seems to be positive on its growth. That’s one of the reasons why existing investors are willing to back Railsr again, helping the company raise USD 46 million consisting of USD 26 million of equity and USD 20 million of debt.
While global equity markets and in particular the technology sector have undergone a material re-pricing in valuations, Shaype, like Rails, has also closed a Series C, securing USD 21.4 million. This reflects that the company’s core offering is valuable and worth expanding, as the main goal of the firm is the expansion of the team to help support a full pipeline of Australian clients, as well as international development.
Aiming to bring its embedded banking platform to more than two million SMEs across four continents by 2024, BankFi successfully closed a USD 4.8 million funding round led by Praetura Ventures.
Finally, a company which started out its life as an invoice finance platform, MarketFinance has decided to wade into the embedded finance market, securing almost USD 35 million to build on this growth by developing its lending APIs and investing further in embedded finance models through integrations with software platforms, accountancy platforms, digital banks, and B2B marketplaces, as it targets unicorn status.
As in the case of BNPL providers, alternative lenders are gaining more popularity building on the boost they experienced during the pandemic. The situation created by the COVID-19 helped alternative lenders to fill in the gap by serving the unbanked groups of customers that don’t have a credit history to get a loan. Alternative lenders make use of technology to penetrate a market that was unexplored by the traditional banking systems. Moreover, they may make a higher profit by providing a large number of smaller loans.
Even though traditional banks still hold the largest market share for business lending, growth has continued to slow. Therefore, there is no surprise that some of the biggest investments in Q3 went towards lending platforms like Wayflyer (USD 253 million) and DANA (USD 250 million), allowing them to expand their range of services and improve their already existing ones.
As Tally has already paid over USD 1 billion in credit card debt for its members, saving them millions of dollars in interest and late fees, it managed to secure USD 80 million in Q3 2022, planning to invest these money its business growth and expansion of its automated debt pay-down system.
Considering the present situation, fintech keeps revolutionising the lending industry, offering access to loans in seconds with a few taps on a smartphone. By using data such as pay stubs and rent payment history, lenders can evaluate those without traditional credit histories. They can use that data to decide whether or not to provide capital to small businesses, offer a credit card, or fund a personal loan – therefore being an important element in expanding the access for all.
What started as a necessity proved to be a practical alternative when talking about ecommerce. The growth of digital commerce represents a permanent change in how people shop. It is suggested that ecommerce will continue to gain traction, even in countries where online shopping is already popular.
Unsurprisingly, ecommerce sales are projected to skyrocket over the next few years. By 2040, it is expected that 95% of all purchases will be facilitated by ecommerce. Ecommerce was well on its way to overtaking brick-and-mortar retail even before the pandemic, but the COVID-19 made the ecommerce space jump 15 years in the span of a few months.
Dianxioami is one of the companies aiming to meet the needs of online and cross-border sellers by providing a wide array of products, including an intelligent customer service system, a global logistics tracking platform, and a cross-border warehouse solution. Part of its latest capital infusion of over USD 110 million will be used to develop and release additional products in more countries, to create a worldwide-connected infrastructure.
As ecommerce continues to grow and evolve, digital payment methods become more and more popular. As companies change their offerings and change the way they operate within the market, they're leveraging payments to help drive differentiation. Satispay is a fitting example to demonstrate this theory, as the company doubled its customer base and expanded in three more European countries only in the past two years. Moreover, in Q3 2022, it raised 317 million in an investment round led by hedge fund Coatue Management, private equity firm Lightrock, Tencent, Block Inc., and Mediolanum Gestione Fondi Sgr.
Airwallex is another company that saw a lot of expansion in recent years, now serving three of the largest ecommerce markets in the world: China, the US, and the UK. In 2022, it managed to close a Series E funding, raising USD 100 million to improve its expense management platform and its credit solution.
The banking industry is also undergoing massive digital disruption, with online deposits, mobile apps, and e-bill payments becoming the norm. Increased consumer demand for digital banking services has given rise to numerous technological advancements within financial institutions, while also creating more niche products suitable for a distinct part of the population.
Fueled by the growth of plug-and-play banking infrastructure, startup niche banks have cropped up – catering to specific demographic or interest groups whose needs were not met by the traditional banks. This trend seems to have drawn the attention of investors, as two such banks gained important funding. GoHenry, for example, has raised USD 55 million, planning to add a new ISA product for savings accounts and to launch a new gamified educational experience called Money Missions. As it is only accessible to UK customers, it also plans to further expand in Europe.
Another such example is Majority, which serves the large Nigerian immigrant community in Houston. It managed to raise USD 37.5 million in a Series B funding round as it explores new offerings. As the neobank looks to attract more of the country’s immigrant population, it is focusing on solving several pain points the demographic faces in accessing banking and navigating life in the US.
It is becoming more and more obvious that the ‘one-size-fits-all’ approach leads to a lack of segment focus. As niche banking is less about the feature set and more about the market positioning, these products can focus on identifying the right customer segment, the unmet needs of the segment, and which products will help them reach profitability.
As we have mentioned in the beginning, 2022 has been a mixed bag for the tech industry so far. Between talks of a downturn, slashed valuations, layoffs, and a generally poor macro environment, fundings have taken a hit downwards from 2021’s hypergrowth.
With challenges expected to continue into Q4’22, VC investors globally are expected to remain conservative with their investments, focusing primarily on proven companies with resilient business models and those able to show profitability. Deals will likely take more time to complete as investors conduct robust due diligence, particularly on forecasts.
About Claudia Pincovski
Claudia is a content editor at The Paypers working on the Banking & Fintech team at The Paypers. Holding a bachelor’s degree in Journalism, she is very passionate about exploring the latest news on financial inclusion, financial literacy, digital banking, and Open Finance. Claudia is a diligent researcher, a meticulous editor, and an active advocate for diversity and inclusion.
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