DigFin asked Varun Mittal, author of Singapore: Fintech Nation, to tell us what he expects to happen in 2023 in fintech. Here is his response.
The post-Covid, recession-facing, and higher-interest-rate economy of 2023 will be known by future generation for its unique features.
The last three years saw multiple tumultuous events spanning pandemic, war, supply-chain crisis, unprecedented money printing, wild stock market swings…and now the world is saying, “Enough! Can we get back to normal, or new normal, or whatever it is?”
As we enter 2023, here are six predictions for how we get there.
G in ESG
While the environment is making ESG a core feature for investors and analysts, in the aftermath of FTX and other corporate governance failures, the G of ESG will become the embodiment of risk management. Investors, business partners, and financial institutions will leverage ESG as a risk-management filter and prioritization tool.
Early-stage companies will need to set up policies, board governance and frameworks to ensure investors and stakeholders have visibility and effective control. ESG will cease to be a priority only among large listed companies. The focus on effective risk management will bring make this framework borderline table stakes for doing business.
Bonds are back
In the aftermath of this year’s meltdown in public markets, and in one of the first years in the last 40 when both bonds and stocks declined in tandem, bonds will become a favorite of investors.
This will upend the business plans of discount brokers and passive wealth platforms focused on stock ETFs. The rapid increase in yield from government saving bonds and government treasuries has brought a renewed interest from retail investors. A new generation of wealth platforms will focus on democratization of fixed income for both retail and institutional investors.
A few fintechs well positioned for this trend are Wintwealth and Goldenpi in India, Bondevalue in Singapore, and Bibit in Indonesia.
With expected US government terminal interest rates to be north of 5 percent, the current generations of venture capital GPs and founders face competition to win capital allocations. These people have not had to fight for money like this since the 1980s.
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Several younger VC funds, which typically do not make money in the first fund due to the industry’s inherent commercial structure, are trying their best to raise their second funds. Limited partners (their institutional investors) across the board have increased their threshold for internal rates of return (IRR) and are rethinking their commitments to both new and established GPs. The total amount of available venture capital will go through a challenging period before normalizing in few years.
Flight to quality
Investors will always chase breakout winners, but for the most part they are consolidating behind the sure-bet companies in their portfolio. The bar for new players in any industry is now high. For example, banks clearly benefited from Covid-19 versus many challengers as retail and corporate customers sheltered in safe harbors.
Regulators raised capital requirements to prepare for a recession, which also favors incumbents. The new generation of digital banks must meet these same capital requirements while developing a brand from scratch. They will struggle in this harsher climate.
Sexy shadow banks
If incumbents are challenged on one side by licensed digital startups, they are also facing fintechs that are stitching together payments, lending, advisory and intermediary licenses to create shadow banks. These new assemblies provide a service similar to a digital bank’s, but without the capital requirements and regulatory constraints.
Aspire, Funding Societies, Validus and Youtrip are just a few regional examples. Their freedom of maneuver will give them a head start over licensed digital banks.
Many startups raised capital at record-high valuations and revenue multiples through 2021. This past year saw their public-market equivalents lose as much as 50 percent to 80 percent of their market value. For unicorns in line to IPO, their revenue multiples are no longer sustainable. They must either make deep cost cuts or raise “down rounds”, which harms the equity position of the founders and early backers and is bad for morale.
One possible solution, for the bigger VCs at least, is to roll up several portfolio companies into a single big one, using stock swaps and cash where absolutely necessary. Rollups can postpone having to reveal bad revenue numbers and give everyone some breathing space; founders will be diluted but not liquidated.
But this strategy assumes the lead capital provider can convince the market that merging these businesses will unleash synergistic energies and isn’t just stitching together a Frankenstein’s monster. You might be surprised how many public-market investors will accept this narrative.