The world is staring at an inevitable economic downturn triggered by the severe health and financial shocks inflicted by the pandemic COVID 19, the Russia-Ukraine war, supply chain disruptions, risings costs, and now going through stagflation which means both low growth and high inflation. A new report by IMF on G20 countries found that the rising inflation has triggered a monetary tightening cycle that is increasingly synchronized; about three-quarters of the central banks have increased the interest rates by 3.8 times since July 2021 on an average.
The rising inflation and likely upcoming recession are destined to bring challenges and opportunities for FinTechs. The current economic climate is disrupting the FinTech industry where it hurts i.e. scaling strategy. The upcoming recession seems likey and to proactively face the hit, FinTechs must create new business models and design their organization in a way that can scale at speed to generate consistent revenue growth with optimum cost and resources. It’s the right time for FinTechs to take a look at their existing technological capabilities to ensure growth and a smooth economic transition even during the crisis.
Most businesses suffer during a recession, primarily because demand (and revenue) falls and uncertainty about the future increases. But there are ways to mitigate the damage caused by the economic turbulence. A study suggests that during the recessions of 1980, 1990, and 2000, 17% of the 4,700 public companies they studied fared particularly poorly: They went bankrupt, went private, or were acquired. But still, 9% of the companies didn’t simply recover in the three years after a recession—they flourished, outperforming competitors by at least 10% in sales and profits growth. According to an analysis done by Bain & Company, the earnings of the top 10% of companies climb steadily throughout the period and continue to rise afterward because the downturns actually encouraged them to adopt new technologies.
In the recent event Money 20/20 Europe trade show, leaders of major FinTechs sounded the alarm about deteriorating macroeconomic conditions. Within the lending industry, Klarna, a buy now, pay later firm is looking to raise fresh funds at a 30% discount to its $46 billion valuation, while its rival group Affirm lost two-thirds of stock market value since they entered into 2022. The upcoming recession will put financial institutions further behind the curve and the FinTech industry will witness a massive impact.
It becomes very crucial for FinTechs to keep pace with the impact the upcoming recession will leave behind on the industry. In this article we have consolidated the major challenges and impact the FinTech industry will experience during the upcoming recession:
The demand and supply pipeline for loans will be impacted during the downturn and will create the opportunity for FinTechs to tap into new offerings that not only satisfy their customers but will delight them. Loans are the driver of profitability in most financial institutions and being the most critical part of the business it’s going to be most at risk during economic turbulence. The lending businesses have to bring equilibrium with the power of technology to create a strong pipeline and a strong portfolio from loan origination, loan servicing, and loan management perspective.
As soon as the pandemic struck the world, digitalization becomes new normal for each and every business, leading a way for FinTechs to deliver low-cost fundraising, account settlement, and collections. Recently FinTechs have made sound investments to enable efficient transactions that are smaller, higher-frequency, and more diversified. But during the recession, they must have to invest in cost-cutting strategies like investing in technology, simplifying products and services, increasing borrower self-service capabilities, improving the productivity of their resources, and many more to sail through the inevitable economic crisis.
The rising interest rates during the recession and ongoing inflation will impact FinTechs drastically. In order to manage the impact, FinTechs have to invest in long-term opportunities created by the depleting economic conditions. In the US, banks are going to increase their investments in technology by 10.6% YoY in 2022 despite the looming recession to facilitate a seamless and improved digital payments experience. The FinTechs have to consider the growing popularity of digital payments among Gen Z and millennials across the globe to sustain their growth even during the crisis. Being relevant to the intended audiences, for both the B2C and B2B customer base, will help FinTechs to tap into the opportunities triggered by the upcoming economic turbulence.
FinTechs will experience a massive rise in fraudulent transactions and suspicious activities during the recession. FinTechs have to be cautious and proactively ready to invest in long-term fraud control measures enabled by cutting-edge technologies to manage the proper flow of business for the clients. This will help businesses with economic depression and facilitate sound loan origination and loan servicing at ease with the impeccable cloud-driven technology. Investing in the future of technologies will help FinTechs make the post-recession market corrections and manage the fate of the industry
The most fascinating future of the world is digital for modern business leaders and the ongoing downturn made them rethink; investing in cutting-edge technologies is not a cost center, but rather a business driver. Despite the fear of approaching recession, more than three-quarters of tech leaders surveyed by CNBC Technology Executive Council said that they expect their organization to spend more on technology this year. The 142 CIOs surveyed by J. P. Morgan’s recent annual chief information officer survey said they have increased their IT budget to 5.3% this calendar year as compared to 5% during the pandemic and will increase even further to 5.7% by 2023.
The dozen notable recessions in the past century triggered businesses to enhance their Tech capabilities. Here are the ways to get prepared in order not to be left behind during this inevitable recession:
Fintechs have to proactively plan for the downturn and find new ways to bounce back when the global economy will correct itself. It will become crucial for FinTechs to choose a technology that promises to help them run more efficiently and scale at speed. Investing in such technology will help you to get the spending under control, continuous savings throughout the life of your platform, streamline decision-making processes, automate the costly & time taking tasks, and fuel outstanding growth with innovative offerings of the future.
Investing in to customize your workflows can boost the productivity levels of FinTechs far more rapidly and get easily designed, tested, and implemented during the slower growth. Like all economic downturns are not the same, so is the action plan for businesses to sail through the upcoming recession. During the economic turbulence, investing in technology tends to be less expensive as Tech leaders recognize that most businesses start conserving capital to stay liquid. For FinTechs, tough economic conditions will be a great time to focus and invest in customizing the workflows, and executing this will enable seamless approval processes and bug tracking to content development and more.
A well-thought-out digital strategy will help FinTechs to improve visibility of resources and better resource management, enhance organization agility and flexibility, lower costs, smoother supply chain management, better customer experience, boost productivity, and faster product development. FinTechs will be able to manage the challenges of the volatile environment by accelerating digital transformation and technology will play a crucial role to grab new opportunities.
Using inefficient technology can put your FinTech at risk of not being able to continue during a significant economic downturn. Investing in Cloud technology is the sustainable differentiator that sets FinTechs apart and helps them with their cost-control strategy. If your business doesn’t operate primarily in the Cloud, now is the time to consider migrating to sustain the upcoming recession and become disruption-proof.
Despite the uncertain economic climate, it’s crucial for FinTechs to invest in cloud technology, customer experience & self-service, analytics, artificial intelligence, and machine learning to outperform the competition and drive positive business outcomes even. If you’re not sure which move to make and you’re concerned you’re at risk, then your business needs a trusted technology partner. LendFoundry’s expertise in leveraging cloud technology helps FinTechs to achieve organizational agility and scalability at speed. We have invested very significantly in Kubernetes, and other Cloud technologies to deliver a cloud-native, API-first, microservices-based digital lending technology platform for loan origination and servicing.
To learn more about our services and offerings and get the acceleration your FinTech business needs, please do connect with us.