2022 Fintech Predictions I got wrong and Why?

2022 Fintech Predictions I got wrong and Why?

Everyone loves to look into the crystal ball, and I was no exception - except when I got it wrong! In the first newsletter of this year I try to analyze and explain why the Fintech predictions I made for 2022 were off the mark. Read on to find out why I got some so wrong and which ones panned out. But more importantly, can we learn from my earlier mistakes and understand what 2023 has in store of the Fintech industry and financial services in general?

But before going on with the rest of the article I would like to invite everyone to subscribe to my newsletter. It would not only help you to develop a deep understanding of the latest innovations in the Fintech space, but also motivate me to continue putting in my effort into delivering well researched content to you and your friends. 

Also to all my Kammunity members, I have slightly rebranded my newsletter. Calling it the Chronicler of Fintech. Let me know what you think of it?

Digital Lending

I really thought 2022 would be the year Digital Lending takes off.

And why not?

Most Payments and digital wallet companies realised that margins were razor thin in payments, and providing affordability solutions like Buy Now Pay Later, can not only improve the basket size for vendors, but also give them much better margins. Plus, this was a dream they could sell to investors for the next funding round. Especially given the under penetrated credit market, not only in India but world over too.

Klarna, the world’s largest BNPL company, saw it value slump by 85% in its last round of financing , indicating what investors feel about "buy now, pay later" lenders. Klarna said it raised $800 million from investors to help it reach its financial goals, but the value of its shares was far lower than it was just a few months ago.

This decrease in value highlights the risks involved in investing in tech companies whose business is to lend to those with little to no credit history and who may not have the ability to service that loan. And yet, the CEO of Klarna, Sebastian Siemiatkowski insisted the deal was a "testament to the strength of Klarna's business."

And then we come the digital lending scene in India!

All I can say is, the Regulators are on top of their game in this one.

The digital Lending framework RBI released, along with a bunch of other regulations, effectively made most BNPL companies either to completely cease their operations or pivot their business model. Which obviously meant all projections and dreams they sold to Investors went poof! Just like that.

Banks and NBFCs started cutting back on their First loan default guarantee partnerships with Fintech, forcing them to lend at much higher rates, thereby cutting through their already thin margins. This in itself wouldn’t have been an issue. But for the gloomy global macro economic outlook, and central banks across the globe raising their interest rates. This meant, no longer could fintech startups fund their operations through VC money.

And without adequate funds to attract customers to their ecosystems, the platform effect just wouldn’t make sense for others to partner with them either.

So, I did mess that one up. And mostly because, I did not anticipate what rising interest rates would mean for the funding environment, and ricochet it would have on growing Fintech, who had gotten used to easy flowing money.

Nor did I anticipate the stringent norms Regulators and central banks would take, to curb the rampant disbursals of loans for things we probably never thought we needed (guilty of being a victim to that myself)

Yes, it is true that RBI's digital lending framework and the global lack of profitability in BNPL business models have affected the potential for lending to be a major use case in 2022. However, it is also possible that other forms of lending, such as peer-to-peer lending and microlending, may become more popular as alternatives to traditional banking and BNPL models. Additionally, technological advances such as artificial intelligence and machine learning may make it easier for lenders to assess creditworthiness and make decisions more quickly and accurately, not to mention innovative new Regulatory frameworks like Open Credit Enablement Network and Account Aggregation. Could this help the case for Digital Lending in 2023? Let’s see.

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Crypto Payments becoming more Widely accepted

Oh gosh, I really wish I could take this one back. But this was the hardest lesson I learnt, and I am hoping my Crypto mistakes make you a wiser and more knowledgeable person in the FinTech space. And hopefully not have such foot in mouth moments in the future.

But lets see how I got so blindsided.

First off, I still believe crypto based payments has a huge use case, and a large target addressable market. However, for it be a robust transaction system there are still some key missing ingredients.

Transactions per Second

Well, hasn’t this been an oft discussed point already, about payment giants Visa and MasterCard processing 35,000+ transactions per second. While Bitcoin, the most popular cryptocurrency processing 7, and Ethereum at 22, even after their switch to Proof of stake.

So not much improvement in efficiencies, right?

Yes, and No.

The reason Ethereum has not been able to scale its transactions, is as much a factor of the blockchains capabilities as it is the rewards associated with each node successfully verifying transactions on the network.

And crypto prices haven’t really gone anywhere but down. Meaning the real dollar incentives started dipping, for both Bitcoin and Ethereum. This coupled with skyrocketing energy costs, resulted in several Bitcoin Mines claiming bankruptcy and selling off their assets. Lesser nodes to verify and transactions to the block, results in even lower transactions per second!

Immutability

I honestly should have realized what a big barrier to payments the immutability feature of Blockchain based cryptocurrencies is. Especially being from the Payments industry.

Now when it comes to Peer to Merchant payments, end consumers trust that system more, where dispute resolution processes are well defined, and has a higher chance of the consumers seeing the money back in their wallets in case of non delivery of services/goods.

Immutability however makes that process of refunds or chargebacks that much more expensive, time and energy consuming.

However, a couple of years from now, what I do believe would happen is that for high ticket Peer-to-Merchant transactions we’d have smart contract being executed. They would ensure some sort of staggered payout happens to merchants, given the users consent. And until the final stamp of acceptance comes within a time bound frame, no transactions would get executed. The merchant though would still have the contract, and the amount they are due, which can further be used for him/her to operate their business.

Let’s revisit this prediction again in 2025, shall we?

Store of Value vs Unit of Transaction

To understand this better, lets take the case of El Salvador. After all, they did legalize Bitcoin as a legal tender for all transactions. So how widespread has crypto payments been?

Tepid at best.

The reason lies in Bitcoin’s “Store of Value”.

If I know something will be worth far more than it is today, given current inflation trends, chances are very low I’d spent it away today. And there lies the biggest hindrance to adoption og bitcoin as a widespread payment tool.

If I have 1 Bitcoin today, I’d keep it in a secure cold wallet somewhere, and never share the keys with anyone. Because I am drawn in by the promise of Bitcoin being worth $1 Million by 2030, that Cathie Underwood mentioned in an interview of hers, despite prices trending at $17,000 at present.

Watch full interview here

https://www.youtube.com/watch?v=v3az_Z3E0MY

HODL? Or pay? That is question.

Tax Implication

I always knew Digital Assets will have to be taxed. I was naïve in believing that the definition of digital assets won’t expand to include Cryptocurrencies.

And not just the Indian government, but even WEF and IMF have come out with frameworks for Governments world over to adopt. All of which include “private” cryptocurrencies.

Now with rising costs of transactions, add to the mix tax eating into your coins worth, every time you withdraw that money out of the exchange. So, unless the coins appreciate way over that limit, the appeal for cryptocurrency just wasn’t there whatsoever. At least for short term traders.

That Fintech Trend sure fizzled out real quick, do you think?

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Flagging Funding and Massive Consolidations

By the end of 2021, I thought we had seen the last of skyrocketing valuations, and investors getting in at any costs to fund fintech companies. Why? Because at that point, no one in the ecosystem was making money. Save for us end consumers who were kind of lapping up all the deals and discounts thrown our way.

And really, in my head (which has been hammered by years of being a part of the formal education system), a business without a revenue model is no business at all, but rather a fanbase. I may be an ardent fan, but I won’t necessarily fund you all the way to my grave.

So, something had to give, and in my opinion it would be funding levels.

However, I felt some of these companies had built products that consumers would like to use, even though they may not want to pay for it every time. In that case, could this user behavior be useful elsewhere, from which companies could generate an income?

Yes, of course. Big financial institutions without the tech savviness, and customer experience to match these new age startups, were starved of monetizable user behavior. So, if funds dried up, Could some of them be acquired by Big Financial Institutions?

Another aspect was that even though a lot of them were labelled “Card” challengers and neo”banks” (neobank), they really didn’t have the autonomy to operate the way regulated entities could.

And so it seemed like a match made in heaven. Yet, at the end of 2022, how many such consolidations did we see in India?

Please don’t answer that, I feel embarrassed even thinking the number.

What happened instead was that some mature startups (God, that sounds like such an oxymoron, how didn’t the stock market see that?) instead chose to give investors an out, by listing on the stock market. This gave early stage startups some leeway to wriggle and manage to land on those funding, even if most of them involved serious haircut in terms of valuations.

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And that brings me to the wrap of the first edition for the year.

I do hope you've all enjoyed your new year celebrations. And if you're looking to stay abreast in the fintech space in 2023, then do consider subscribing. It'll also motivate me to stay on track with my content despite all the changes on the work front!

See you on the next edition.