Amidst a Volatile Economic Environment, Clear Trends Emerge

After more than a decade of unstoppable growth, the tech sector – and the economy in general – is preparing to weather a historic economic downturn. While fintech is no exception to the volatility, there remains strong interest from both investors and consumers in tech-enabled financial tools.

As market participants look to course correct, the right financial tools will help stave off collapse. As a result, capital providers are sure to greatly direct investments toward the sector. Despite venture capital funding slowing substantially quarter over quarter starting in Q2 2022, approximately 1 of every 5 VC dollars continue to be deployed into fintech companies today. Both fintech and finserv have the largest gross profit pool across every major sector in 2021, representing a $6.5T opportunity, continuing to be an attractive investment in uncertain times.

In addition to being relatively well positioned as an industry, there have also been a handful of trends that we’ve seen take shape over the last year that are likely to persist and push the pace of the industry beyond other tech sectors.

Embedded Finance

A growing trend over the past few years is the concept of placing financial products and services directly at the doorstep of the consumer, in a traditionally non-financial user experience. Known as “embedded finance”, these tools and services can make an otherwise disjointed user journey seamless for both the consumer and the business.

• Consumers: the concept of “buy now, pay later” has become ubiquitous in the shopping experience, allowing customers to delay paying for goods or services. Apple recently joined an already crowded party led by Klarna and Afterpay with Apple Pay Later.

• Businesses: a likely larger opportunity is providing embedded financial tools to businesses. Offering financial products such as lines of credit, without needing to leverage disparate tools makes the end customer more likely to utilize these services.

With the rise of Banking-as-a-Service (BaaS) providers – program managers between technology companies and traditional banks – it’s become easier to embed traditional banking services into non-banking platforms. In an uncertain macroeconomic environment, we expect embedded finance to continue to grow, outpacing others within the space, due in large part to the relative ease of implementation and demand for services. We also expect to see rapid growth beyond traditional online retail and into other consumer financial services such as insurance, treasury, and debt financing/factoring for consumer brands.

Debt Financing / Factoring

A leading indicator of a contracting economy is the general tightening of wallets. Loss of purchasing power and increased consumer risk aversion lead banks and venture capitalists to restrict access to capital. Retail and e-commerce businesses will look to shorter-term solutions to bridge the monetary gap between paying for inventory and selling it.

Businesses, especially tech startups, will likely move to debt financing or factoring to fund operations over other more traditional sources, such as equity financing.

• Debt Financing: rather than give up a portion of their business, debt financing functions more as a loan or line of credit. While debt financing can be unsecured, there is likely to be a significant tightening of the financing market, requiring businesses to secure loans with assets such as inventory or receivables.

• Factoring: factoring allows businesses to sell or leverage its accounts receivables to a third party, who will purchase their AR at a discount. This provides the business access cash quickly and gives the third-party provider ownership of the entire receivables amount.

Alternative financing solutions will present a dynamic opportunity for tech-enabled lenders like Ampla, a leading provider of line of credit and banking services to consumer packaged goods companies, to play a more meaningful role in providing brands access to capital. Sidestepping manual underwriting and leveraging a streamlined digital experience, fintech lenders are catering to more digitally native founders looking for more accessible capital solutions.

Bundling of Services

The almost ubiquitous availability of capital in Silicon Valley over the last decade led to a proliferation of startups looking to serve specific customer needs. While increased competition and choice have maximized consumer welfare, it’s also created complexities in the fintech stack. The typical consumer has to manage a disparate set of providers for very niche needs.

In the consumer brand space, a founder or operator now has separate tools for bill pay, banking, funding, credit cards, accounting, etc. This is proving increasingly burdensome. As with the consolidation we’re seeing broadly across all industries, we expect fintech to go through a bundling (or re-bundling) phase, wherein platforms are expanding their product offerings either via acquisition or homegrown product development.

Uncertain Future for Decentralized Finance

Since the words “ethereum” and “smart contracts” entered the technology zeitgeist, decentralized finance (“DeFi”) has been the ideal use case and primary accelerant for adoption of blockchain technology, from startups to the world’s largest banks. DeFi is a fast-growing segment of the cryptocurrency and blockchain ecosystem, and it has the potential to revolutionize the way we think about finance.

One of the key advantages of DeFi is its ability to provide financial services without the need for intermediaries such as banks or other financial institutions. This not only reduces costs but also provides greater control and transparency for users. In addition, decentralized finance allows for greater innovation in financial products and services, as developers can build on top of existing protocols and create new applications and use cases.

An example where DeFi could have a significant impact is in the realm of international finance. Currently, cross-border transactions are often slow, expensive, and subject to high fees and exchange rates. DeFi can streamline these transactions, making it easier and cheaper for people around the world to conduct business and exchange value.

Of course, there are also challenges and risks associated with decentralized finance. One of the main concerns is around security, as DeFi protocols are still vulnerable to hacks and attacks. In addition, there are questions around regulatory oversight and how to ensure that users are protected from fraud and scams. The recently discovered alleged fraudulent activities of FTX has changed the way the fintech sector perceives DeFi, and anyone who thinks they can give a solid prediction as to its immediate future isn’t being totally honest with themselves.

While it plays in a pool of corrupt participants, it has yet to be knocked off its pedestal as it continues to be the barometer of success for blockchain as a scalable and reliable technology. As more people become aware of the benefits of DeFi and as more developers and entrepreneurs enter the space, we can expect to see even more innovation and growth in the years to come. Decentralized finance has the potential to create a more inclusive, accessible, and transparent financial system, and that's something that could benefit us all.