The changing fintech landscape

The global fintech sector has evolved dramatically over the past decade with rapid growth alongside widespread smartphone adoption.

It has fundamentally transformed areas like payments, banking, and lending, while giving rise to some of the best-known startups such as Afterpay, Judo Bank, Airwallex, and PEXA.

Globally, fintech funding surged to US$440 billion between 2014 and 2022 (BCG) largely due to a favourable investment climate. Low interest rates drove valuations higher for growth-focused fintechs throughout this period.

However, the fintech sector’s outperformance came to a grinding halt in 2022 when fintech funding experienced a significant decline—it plummeted by a third to US$63 billion (S&P Global Market Intelligence) due to a widespread tech slump. Fintechs lost more than half their market value on average in 2022.

The sector’s fortunes haven't improved since then. The financial world continues to face uncertainty in the form of rising interest rates, a more proactive regulatory environment, and emerging technologies like generative artificial intelligence, whose impact remains to be seen.

As a result, the fintech sector’s overriding narrative has shifted…it’s no longer about growth at any cost—and unit economics matter.

Changing growth verticals

Until recently, payments were at the forefront of the fintech journey, representing 40 per cent of fintech revenue in 2021.

However, in 2022, the aggregate funding value in payments dropped from $30 billion to $19 billion globally amid rising interest rates. The banking technology vertical, including neobanks, also saw funding decline 42 per cent to $10 billion.

Despite the slowdown, there are bright spots within the payments vertical.

For example, online money transfer firm Wise shares soared 16 per cent last month after the company posted higher profits as the business benefitted from rising interest income.

The outlook for payments arguably remains bright. Payments will continue to dominate the global fintech sector until 2030, according to BCG.

But longer term, B2B (fintech serving small businesses) is expected to be the next big thing.

The shift towards cost optimisation and growth is likely to pave the way for embedded finance, enabling fintech-as-a-service companies to thrive.

B2B to power the next phase

The World Economic Forum estimates that SMEs account for nearly 70 per cent of global GDP but continue to remain poorly served — a significant opportunity for fintech companies.

As a result, B2B fintech revenues are projected to grow 32 per cent by 2030, reaching US$285 billion.

Fintech-as-a-service (embedded finance) providers are leading the B2B growth opportunity. Embedded finance infrastructure can enable even non-financial businesses to easily integrate financial services within their offering. Hence, these companies are projected to grow despite the recent slowdown across the fintech sector.

Already, seed rounds are becoming more popular, with venture capitalists increasing investments in early-stage firms.

For example, the Australian embedded finance platform Shaype raised A$33 million in series C funding last year. The company offers financial services for the HR, financial services, proptech, and government sectors.

Another player, Till Payments, which provides payment platforms and terminals across online and bricks and mortar stores, closed a $70 million funding round in March this year.

And Melbourne-based Airwallex that provides banking and other financial services to businesses, raised A$159m last year at a flat valuation of $5.5 billion. The company managed to avoid a down round at a time when just three months earlier BNPL Klarna saw its valuation drop 85 per cent.

Bright future for embedded finance

Investors remain supportive because the outlook for embedded finance is bullish.

According to a recent report published by ResearchandMarkets.com, embedded finance in Australia will grow 46.4 per cent to US$4,277.0 million in 2023.

New use cases for embedded finance are popping up in industries like transportation, construction, payments, and healthcare.

Companies like Meta, Airbnb, Uber and Amazon are at the forefront of embedded finance adoption as they roll out financial products on their platforms.

Uber also provides a range of services for drivers and couriers within its app, including debit card and cashback rewards.

And recently, payments company Wise launched a banking-as-a-service platform in Australia, allowing local fintechs and non-banks to offer business deposits and payments.

Additionally, generative AI is expected to disrupt the space longer term.

On that note, Square, a payments and business software provider has recently started using generative AI to help businesses target customers with offers.

This is just the beginning.

More SMEs are likely to embrace embedded finance technologies which help them grow their businesses, making fintech more relevant across this market, especially in payments and lending.

Key takeaways for investors

Fintech's transition from standalone products/services to embedded finance will expand the available market opportunities while reshaping financial services.

Here are the key points for investors to be aware of:

1.Payments dominated the last wave of fintech growth, B2B will rule the next.

2.The shift towards cost optimisation and growth will pave the way for embedded finance companies to thrive in the B2B fintech space.

3.ResearchandMarkets.com estimates embedded finance in Australia will grow 46.4% to US$4,277.0 million in 2023.

Disclaimer: This article is prepared by Ankita Rai. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.