Fitch Ratings has posted a comment on the Fintech market, taking a neutral stance on innovative financial services firms for 2023.
Fitch predicted continued revenue growth for North American and European Fintechs in 2023, but at a slower pace than in recent years.
As one would expect, Fitch points to macro-related risks as interest rates rise to battle sky-high inflation. Fitch expects this will “pressure consumer and business money flows in 2023 and hurt Fintech fundamentals.”
At the same time, Fitch believes the transition to Fintech is ongoing, and Fintechs are well positioned to continue to capture market share from legacy financial services.
“Fitch expects Fintechs to have a higher capital allocation threshold in the near term given the rising cost of capital. But public and private Fintech equity valuations declines during 2022 could propel capital to be deployed into M&A and buybacks in 2023-2024 if recession fears subside. Some of the biggest Fintechs have declined 70%-90% or more from their peak market valuations. Deal volume similarly fell substantially in 2022 as corporates reset to the new normal. But Fitch expects the sector to remain attractive for debt and equity investors, despite a lower propensity for leverage due to the higher cost of debt.”
Themes for 2023 beyond a challenging economic environment are digital payments, B2B, and a potential strain in credit. At the same time, more regulation is probably on the way – perhaps most pressing for crypto markets.