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  • Writer's pictureMohamed Soltan

The Fintech Market Right Now: Challenges, Trends, and Opportunities

The fintech market is robust, even if 2022 was a downshift from 2021 and companies now appear to be tightening their belts.

Here's what investors should know heading into 2023.

A Cool-Down after 2021's Highs

The global fintech market was valued at $110 billion in 2020 and is expected to top $698 billion by 2030, with a compound annual growth rate (CAGR) of 20.3 percent over the decade, per Allied Market Research.

Fintech had a banner year in 2021 in terms of venture funding, as it claimed 20% of all global venture dollars. Investment in the fintech sector more than doubled from 2020 to 2021, and the number of unicorns that emerged in 2021 was also more than double the previous year's tally, according to CB Insights State of Fintech 2021. The digital payments segment claimed the lion's share of funding, while digital lending and blockchain, cryptocurrency, and Web 3.0 companies also attracted record funding.

Now, with 2022 in the rear-view mirror, things look different. Inflation, an uncertain economy, and a barrage of interest rate hikes are taking their toll; the Fed increased interest rates seven times this year, as of mid-December 2022, and additional hikes are likely in 2023. Globally, funding for fintech companies is still above 2020 levels, but valuations have cooled, with late-stage fintech companies seeing the largest declines, per Silicon Valley Bank's State of Fintech 2022.

From the year-over-year perspective, blockchain, crypto, and Web 3.0 were the most resilient in maintaining VC interest, but after the crash in crypto prices, funding slowed in this segment significantly in Q3 2022 and Q4 deals will also likely be down. In addition, consumer-facing apps—including payment, personal wealth management, and alternative lending apps—were among the hardest-hit in terms of venture funding losses this year.

Growth is still happening, but fintech companies are growing more slowly than they did in 2022 and spending less, although the same could be said of other economic sectors, too. Still, fintech's long-term growth potential is strong, as shown by the decade-long projection from Allied Market Research.

Trends and Challenges

Looking ahead to 2023, a several trends stand out:


  • Climate fintech is growing in visibility. These digital solutions help organizations track carbon emissions and carbon trading.

  • AI will continue to reduce costs for banks and financial institutions, especially via chatbots/conversational banking, fraud detection, and underwriting.

  • Regtech will see strong growth as companies, particularly financial institutions, face complex challenges related to regulatory compliance.

However, two trends deserve a little more in-depth scrutiny.

Embedded finance will continue to grow.

Embedded finance is what it sounds like—financial services and tools embedded into nonfinancial products and e-commerce platforms. If you've bought something online in the last few years, you may have noticed that you could pay for it in installments, instead of all at once, up front. This Buy Now, Pay Later (BNPL) option is among the more noticeable forms of embedded financing for consumers, and it has seen strong growth; by 2026, more than $576 billion in transactions may be completed via BNPL financing. However, there are so many other examples of embedded finance:


  • branded banking services (banking as a service, or BaaS) for users of a platform, like Lyft drivers or Shopify store owners

  • tailored insurance policies for a product or service available at the point-of-sale

  • the ability to pay for something within a social network, device, or appliance, such as an IoT-connected refrigerator

Convenience is the name of the game here—embedded finance allows the end user to access financial products as part of a transaction, without having to go to traditional financial institutions for standalone products. For the company that offers the embedded finance product, the benefits are an enhanced user experience, greater customer engagement, and new revenue streams.

Embedded finance isn't new per se, but as McKinsey notes, what makes the current slate of technologies so powerful is how they are integrated into the digital platforms people use every day. Financial products are becoming a natural part of many transactions, for many people and businesses, rather than something acquired separately. Currently, the embedded finance market is projected to grow at a rate of 39.3% per year in the U.S., according to a ResearchAndMarket.com report.

An increase in regulatory scrutiny may be ahead.

Regulation will likely be top-of-mind for many fintech companies heading into 2023. According to Alloy and Gartner Peer Insights' Fintech in 2022 survey, 32% of fintech executives said regulatory challenges had the most impact on their business in 2022, as opposed to 16% saying the same thing in 2021. Regulatory challenges were also cited by 47% of respondents as the biggest threat their business right now.

These execs were perhaps anticipating the U.S. Treasury Department's recent call for more oversight of the sector, as more fintech companies—most of which fall outside the banking industry's regulations—begin to provide the core financial services that were once only provided by banks.

Some segments of the fintech industry may be facing more scrutiny than others. For example, the BNPL market has exploded, but in September, the U.S. Consumer Financial Protection Bureau issued a report indicating its intent to increase regulation of this type of short-term financing.

Opportunities

Fintech may have cooled down in 2023, but make no mistake: fintech is a part of life now, for consumers and businesses. Its long-term growth is not in doubt, despite the crypto crash. Exciting things are on the horizon for the coming year, though investors would be wise to pay attention to the regulatory climate.

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