5 trends to watch in Fintech | White & Case LLP

by James · April 27, 2023

The fintech landscape continues to evolve rapidly. Recently, it has faced various setbacks, including a cooling of appetite for crypto risk and a tightening of the VC funding market. But the innovation forces driving the digitization of all aspects of financial services are only getting stronger. It is against this backdrop that we assess some of the trends within fintech in the near to medium term.

Table of Contents

1. M&A growth

Fintechs find it difficult when it comes to fundraising. Many are still pre-profit (some pre-revenue even) and access to capital to fund their capex, growth and customer acquisition is key. As VCs and growth capital providers slow their pace of investment and banks reverse their appetite for annual recurring revenue (ARR) lending, we consider it likely that fintechs will find themselves playing a consolidation game, looking to leverage synergies and build scale through acquisitions. Instead of paying cash, fintechs are likely to combine on a cashless basis by issuing their own equity as consideration.

2. Strategic partnerships

A quick answer to the rising costs of customer acquisition is to be found in the loyal ranks of traditional bank customers. The same institutions that many fintechs seek to disrupt or mediate (primarily the incumbent tier one banks and insurance companies) actually provide fintechs with part of the solution to their growing pains. By working together, banks and fintechs see the benefits of a symbiotic relationship where banks bring the critical resources of trust, robust regulatory infrastructure and a loyal customer base, and fintechs provide the innovation, technology and cloud-based user experience essential to a bank’s digital transformation strategy.

3. Cryptocurrencies

Has fiat won the battle over crypto? Recent events would certainly lead you to believe so. However, any sense of victory for the skeptics will be short-lived. Token values are recovering, networks are migrating away from the energy-intensive Proof of Work basis to a more efficient Proof of Stake approach, there is growing appetite to embed smart contracts into tokens (e.g. creating non-fungible tokens or NFT er), and there continues to be high investment in digital worlds suitable only for cryptocurrencies and tokens. These factors point to a resurgent (though perhaps altered) crypto community thriving in the longer term. So much so that concerns over the risks and threats posed by such cryptocurrencies are forcing central banks to fast-track plans to establish their own central bank digital currencies (CBDCs). Many are preparing to create DLT-based currencies they can regulate and control that will one day not only replace their non-digital predecessors, fiat currencies, but also triumph over the more “anarchic” (or should we say “democratic”) ones decentralized. digital rivals.

4. Accelerating digitization of market infrastructure

Out of sight (and mind) of most consumers or retail security holders sits a huge unwieldy network of intermediaries who together provide the financial plumbing for the entire financial system: payments, settlement, custody, agency, registrars, clearing, etc. Actors in this network have to date approached digitization with varying degrees of enthusiasm and speed, some no doubt driven by vested interests in resisting technological leaps that would threaten their existence. However, new financial markets are opening up all over the world and are being built from the ground up on a digital basis. History shows that capital moves quickly to markets that are most efficient and offer the least friction. Competitive pressure will break through vested interests. Markets will accelerate the overhaul of legacy infrastructure models in favor of digital alternatives offered by fintech.

5. Regulatory spread

All of the above will require regulators globally to be on their toes, adapting existing legal frameworks to modern financial technologies, collaborating with peer regulators across the global financial market, and designing new safeguards to ensure systemic risk and consumer vulnerabilities are managed. Evidence suggests that they have this task in mind, but the role is unenviable. They must stay at the forefront of a fast-moving and complex digital transition, while addressing the deeply polarized concerns of market players – some are pushing for regulation or bans, for example. cryptocurrencies and others run in the opposite direction.