According to CB Insights’ 2022 State of Fintech Report, global fintech funding slumped by 46% to $75.2 billion in 2022. During the last quarter of the year, the industry generated $10.7 billion in funding, which is its lowest since 2018. The decline in funding comes even as the total number of deals signed during the period dropped by 8% year-over-year (YoY) to 5,048 deals.

In addition, the intelligence report said global mega funding rounds decreased by 52% YoY to 179 in 2022, even as unicorn births during the period collapsed by 58% to 69, which is down from 166 in the prior year. This represents the lowest unicorn birth since 2022, the report said.

The overall decrease reflects reduced funding across verticals in the industry, from payments, banking, and digital lending to wealthtech, insurtech and capital markets tech. While funding in the payment sector slashed by almost half (49%) to $20.8 billion, which is down from $40.5 billion in the prior year, that of the banking industry weakened by 63% to $9.4 billion compared to $25.3 billion in 2021.

Furthermore, funding of digital lenders depleted by 53%, falling to $11.5 billion from $24.7 billion in the previous year. The same trend was reported in the wealth tech and insurtech sectors: capital financing fell by almost 41% to $8.8 billion for the former and by 53% to $8.4 billion for the latter. Moreover, capital markets tech saw a 39% reduction in new capital, which touched $2.3 billion during the period.

Across regions, fintech funding slumped by half YoY to $32.8 billion in the US, by 48% to $1.3 billion in Canada, by 37% to $15.9 billion in Asia, by 34% to $19.2 billion in Europe, by 71% to $4 billion in Latin America & the Caribbean, by 27% to $1.1 billion in Africa and by 57% to $0.9 billion in Australia.

Michael Ashely Schulman, a Partner & the Chief Investment Officer at Running Point Capital Advisors, believes that the dent in cryptocurrency prices as well as many company collapses recorded last year made enthusiasm for fintech venture capital investments fall dramatically in 2022. Schulman added that "the closing of initial public offering opportunities on the heels of declining stock markets, the end of the SPAC fervor, and the closures of many once promising and well-backed companies" are other negative factors.

"The model of growth at any cost may have held some logic in a zero-interest rate environment but lost a sense of reasonableness as financing costs escalated,” Schulman told Finance Magnates.

However, despite the drop in funding, CB Insight's report shows that the fintech industry’s outing in 2022 still beats its performance from two years ago. Compared to 2020, funding jumped 52% in 2022. So, what went wrong last year?

Did Fintech Bite Off More than It Could Chew in 2022?

With a slowdown in growth that trailed the global economy post-COVID-19 and rising inflation and interest rates, 2022 turned out to be a tough year for the fintech industry. This is even as the industry accounted for some of the largest mass layoffs recorded in the past year.

In the United States, the payments processor Stripe fired 1,120 employees or 14% of its 8,000 workforce in November, months after TaxJar, a compliance startup that it acquired a year earlier, also reduced its headcount. On top of that, in Denmark, spend management startup, Pleo, which is one of Europe’s most valued fintech firms, announced plans to prune its team by 15%.

Other fintech firms such as Swedish buy-now-pay-later, Klarna, California-based neobank Chime and even the African cross-border payments company, Chipper Cash, all announced mass retrenchment last year. Even top bankers such as Citigroup and Barclays were not left out-and this trend has even continued into 2023.

Apart from layoffs, the fintech industry saw some players exit the markets last year. In April, the checkout startup Fast, which previously raised over $102 million, shut down its business citing slow growth and high cash burn. In fact, another US-based startup, Nirvana Money, went down even faster, shutting its door only 22 days after its launch.

Other startups also shuttered their services in 2022, from German carbon-accounting startup Planetly, the UK challenger banking app Dozens, to Australia’s first online bank, Volt Bank. One narrative is common to most of the closed fintech businesses: negative macroeconomic conditions and high operating costs.

Tom Bell, the CEO of Maast, a subsidiary startup of Georgia-based Synovus Bank, explained that most businesses, pressed by a potential looming recession and need to cut costs, are motivated more than ever before to operate as efficiently as possible.

"To do so, many business owners are streamlining their work, looking for a Swiss Army Knife approach to financial services that will reduce the number of vendors they need to keep their doors open,” Maast told Finance Magnates.

Will 2023 Be Any Different?

Already, the fintech layoff wave has streamed into 2023 as Goldman Sachs announced its plan to cut 3,200 jobs earlier this month. Also, fintech firms such as Finastra, Pagaya Technologies and Avalara have pruned their workforce since the start of 2023.

Over the past decade, global venture capital funding rose from about $1.8 billion per year to an annual run rate of over $30 billion amidst a low-interest rate environment. However, with inflation still at historic highs, fintech funding is expected to remain below the growth level recorded in 2021. This is even as investors and experts expect a recession in 2023 and further interest rates hikes starting this month (February) from central banks such as the US Federal Reserve, the Bank of England and the European Central Bank.

Regardless, Dima Kats, the CEO at Clear Junction, explained that while the environment will be challenging this year, fintech will remain a top priority for investors as more of them will focus on investing in early-stage startups that require less capital.

Furthermore, experts believe that a number of other trends will define the fintech industry in 2023. For instance, Bell notes that more banks will try to get into the embedded finance market even as the market moves beyond payments. The CEO opines that embedded finance firms will seek to solve industry-specific needs although he expects that not all fintech providers will be on equal footing.

“New entrants to the market will struggle without the expertise needed to navigate complex banking rules and the vagaries of different industries,” Bell told Finance Magnates.

Additionally, Schulman believes that investors will continue to reset their expectations and seek sustainable ways to stay profitable.

“I foresee several global fintech trends going forward: a continued ramp up of embedded financing along with a thinning of the ranks amongst the top players; further implementation of alternative financing with a slew of new and up-and-coming players growing the pie; stronger focus on fintech solutions in emerging markets and fast growing regions like Nigeria, Indonesia, and Brazil,” Schulman explained.