The Rise and Fall of Fintech Funding: An outlook on the fintech ecosystem in 2023 and beyond | EMBank CEO Sarp Demiray

Fintech funding skyrocketed in 2021, reaching an all-time high. According to the CBInsights’ State of Fintech 2021 report, a total of 633 deals were completed, representing a total value of $132B.

But in 2022, the tides turned. With a 46% decline compared to the previous year, global fintech funding reached only $75.2B in 2022. The number of mega-round fundings fell 60%, and fintech unicorn births declined 87% compared to 2021 (CBInsights State of Fintech 2022 report).

In order to set the right expectations for 2023 and beyond, it’s vital to correctly assess what happened in this period of decline. Is this drop merely a recalibration, or does it represent a total collapse of the fintech sector? Was 2021 the anomaly, or 2022? Will the recent situation lead to a major transformation in fintech? Let’s take a closer look.

The fintech funding boom of 2021

There had already been a steady increase in fintech investments in the decade leading up to 2021. But the boost in 2021 appeared a bit frantic – not unlike the gold rush of the 19th century and more recently, the investment frenzy for internet companies prior to the dot-com bubble of 2000.

Fintech, a similar disrupting technology-based sector with huge potential, was leading to a funding boom for around a decade. This funding peaked in 2021 fueled by FOMO – fear of missing out – and an abundance of funds available following the monetary policies implemented during the pandemic.

The fintech funding decline of 2022

“At some point during this process, valuations … went out of the window. To me, this makes no sense at all, and reminds me how eCommerce start-ups with fancy domain names were valued in the billions in the early 2000s.”

Ozan Özerk, Founder, EMBank

First and foremost, fintech funding seems to have been affected by current markets’ negative outlook and a general decline in the global economy. Research by JP Morgan and Bank of America forecasts that this downturn will last until the last quarter of 2023. The ongoing war in Ukraine, widespread post-pandemic inflation, and expectations of a global recession have led to a loss in appetite for business investments, and at the very least, changed investors’ evaluation of investment opportunities.

More specifically, investment perspectives have become more prudent, with investors taking a more precautionary approach. But should this come as a total surprise? EMBank Founder Ozan Özerk’s comments from 2021 anticipate the current situation: “At some point during this [fintech investment] process, valuations based on the financial fundamentals went out of the window. To me, this makes no sense at all, and reminds me how eCommerce start-ups with fancy domain names were valued in the billions in the early 2000s.”

Recalibration towards prudency

The burst of the dot-com bubble did not end the internet economy but rather streamlined it to good effect. Survivors such as Google and Amazon became sector leaders, while new internet startups were forced to come up with stronger ideas, better products, and more robust business models to receive funding.

Seen in this light, 2022’s decline in fintech funding seems more like a normalization process than a cataclysm; indeed, the current transition is not as unkind as that of 2000. Now investments are being prudently recalibrated, focusing more on quality as opposed to quantity. In this way, investments are turning towards more profitable and reputable companies. Considering all these aspects, the current decline in growth can be seen as a period of maturity leading up to the firm establishment of strong fintechs.

Where does Europe stand?

Europe seems to be the least affected region in the current fintech funding decline. This is partly because Europe’s fintech regulations match a more prudent investment perspective. By complying with these regulations, European fintechs have become what investors are looking for and thus have been affected the least.

EMBank’s outlook on fintechs

At EMBank, we evaluate the current period as an opportunity for equilibration. Following this year’s adjustments and regulatory changes, the fintech ecosystem will become healthier than before. We strongly value the business model and determine (or even invent) the unique solution for each company including not only fintech but also B2B2B, B2B2C, SMEs, and supply chain providers.

Today’s current conditions match our banking mindset because we prefer quality over quantity and believe in expertise and prudence. We will keep working with fintech start-ups without traditional, more conservative banking reflexes. We believe that fintechs function as the catalyst that accelerates other businesses and always see the fintechs not only as clients but also as our partners. In embedded finance, for example, forming a three-party partnership with a retailer and a payment provider seems not only plausible but beneficial for all parties, including the market itself.

The fintech market will keep offering more and more, and exponentially multiplying its value. This growth will be multi-dimensional, as the previous focus has mostly been centered on the consumer dimension and thus, many business model potentials remain to be discovered. Banks with a smart vision and the capability to perceive the potentials of such fintech start-ups will fuel growth and create a holistic ecosystem for fintech financing.

Being based in Lithuania also helps the healthy growth of our fintech business. Aiming to become a fintech hub, Lithuania offers many potentials, as represented by its place of 11th out of 190 in business establishment capabilities. To this end, we are currently working on financing programs for fintech start-ups and local businesses in partnership with Invest LT.

How does EMBank respond?

As European Merchant Bank (EMBank), we understand the nature of fintech business: as such, we can evaluate and assess their needs before formulating a solution. As a challenger bank, we are flexible regarding our clients’ requests, which include fintechs, SMEs, and corporates, by focusing on innovative solutions delivered with a human touch, instead of strict procedures and tiresome bureaucracy. We invest in building our organizational capabilities to build processes and flows that better mitigate possible risks, making us solution-oriented partners for credible, compliant, and competent fintechs.

If you’re looking for a dynamic bank and an extraordinary partnership, please send an email to info@em.bank to arrange a telephone call.