For the Fintech space, 2022 was an eventful year, and many companies will need to enter a new phase in 2023 while facing challenging economic conditions. It's important to remain ahead of the curve by understanding both the challenges and opportunities that will be presented over the next few years.
Here at Velmie, we conduct annual Fintech Market Research to learn first-hand companies’ predictions. Below we are going to cover some questions: main challenges to Fintech companies in 2023, main threats of working with SaaS/BaaS vendors, what are the main criteria when choosing a software vendor and why it is important to partner up in the Fintech industry.
Major challenges to Fintech companies in 2023
Finding and retaining talent is expected to remain a key challenge for Fintech companies next year, a serious enough challenge to potentially put the brakes on growth in the industry. In the US and Japan, growth in new tech jobs in Fintech has been well over 200%. A survey conducted by the Hong Kong Institute of Bankers found that 90% of the respondents believed the Fintech skills gap was a major problem for the industry.
According to the Fintech Talent Report 2022, four talent profiles remain relevant for Fintechs – Commercial Evangelists, Technology Wizards, Corporate Drivers, and Operations Champions. The demand for the profile of Technology Wizards continues to evolve, with a growing focus on emerging areas such as Digital Assets, Applied Intelligence, Blockchain, 5G, and Cybersecurity. However, the most in-demand Fintech roles in 2022 and in the next 1-2 years are those in Sales and Marketing / Business Development and C-Suits (e.g. CEO, CFO, COO). This speaks to the need for growing Fintech companies to expand their business regionally and globally.
Fintech companies must compete not only with each other but with organizations in every industry that needs talent with similar skills. Among the key tips in a Fintech, talent strategy should be differentiation by building a compelling employee value proposition, partnership for talent execution, hiring for potential over experience, and people development.
Moreover, retaining talent will also be crucial in a tight and highly competitive labor market. Failing to do so will be costly – not only in the cost of recruiting new staff but in the disruption it causes to the business.
Customer acquisition is also expected to be a major challenge as competition in the sector increases and competition intensifies. Customer acquisition in Fintech is a long and expensive process. It covers all steps by the marketing and communication department, the sales and business-development department, and the product management and UX design department. That means Fintech companies will need to make use of all the emerging technologies at their disposal to stand out among customers. A good customer acquisition strategy should include partner ecosystems and a customized approach, with targeting and tailoring to each customer segment.
The third most popular answer among the respondents was finding investors and raising funds as their main challenge in the year ahead. Against a backdrop of ongoing volatility and tough economic conditions, fintechs will have to present potential investors with compelling business strategies and motivate strongly why they are likely to succeed versus their many competitors if they hope to receive funding support in 2023.
Among other challenges to Fintech companies are high interest rates and cost of capital, finding the right partners to grow the product offerings and regulations.
«One of the main challenges is changing regulations. For example, we are building wallet solutions that are not regulated but maybe in 6 months or 1 year they will be. One more challenge is about a lot of changes in suppliers and providers. We see a lot of new players going out in the market and it is difficult to choose suppliers that are trustworthy in a middle-term relationship. The most important criterion that we apply when choosing a provider is its success cases. As it is important to be sure that the company can do what we need them to do. Another criterion is financial capital. There are a lot of companies, mostly startups, that try to do complex, expensive things, and they can disappear tomorrow.» - Alberto Mateos, COO Wagestream.
Main threats of working with SaaS/BaaS vendors
For fintechs, the biggest threats and challenges of working with BaaS vendors in 2023 are expected to be regulatory requirements and standards, missing features, and a lack of flexibility. Competition is likely to ramp up considerably in 2023 as the industry expands and regulations are set to become more stringent to protect consumers. Thus, fintechs will, more than ever, need the flexibility to innovate and adjust their offerings where needed and cannot afford to deal with missing features that undermine their products and services when they are competing for customers.
«There are two main threats when working with SAAS & BAAS vendors. Lock in: If you rely solely on one vendor, you run a real risk of not being able to grow the way you want to grow. Just a couple of years ago, the tech dictated what the business could do, today, luckily we are in a better position; with the ever-growing selection of services out there, we can now let the business decide what the tech should do, assuming you don't lock yourselves in with one single vendor (that doesn't want to change anything). Regulations: We see more and more demands from regulators that your infrastructure should be safe and transparent (for the regulators), so if you can avoid relying on a SAAS solution for your Fintech, your conversations with the regulators will be much easier» - Carl-Johan Larsson, Partnership manager at Velmie.
Security and control of the data is another crucial challenge when working with SaaS/BaaS vendors. With SaaS, some (or all) business data will be stored in the data centers of the SaaS provider. Most businesses will not like the idea of handing over control of their data to someone else. To ensure that their data is secured, a business must select a reliable provider and write down a Service Level Agreement contract. Moreover, choosing a Saas/BaaS vendor makes you not sustainable in the long run due to license and transaction markup fees.
The main criteria when choosing a banking software vendor
The most important criteria banks and fintech institutions will consider when choosing a banking software vendor in 2023, according to our research, will be price, innovation, a vendor’s reputation, and the ability to deliver fully compliant, secure and reliable software solutions.
In a world where inflation is higher than it’s been in decades, price is again top of the list of the most important criteria for 2023 and will likely become even more of a consideration in the decision-making process in the years ahead. However, there’s a risk that the price comes at the cost of not meeting the other criteria respondents view as crucial when choosing a banking software vendor, including working with a reputable vendor and meeting compliance and security best-of-breed standards. Thus, price should be considered in the context of value, with businesses confident that they are getting the best value from their vendor but meeting all their other quality standards.
The fast-paced evolution in the global Fintech industry and intense competition that follows in its wake make innovation and adaptability the natural second most important consideration for choosing a banking software vendor. The very nature of the Fintech industry is to disrupt the prevailing financial services landscape and thus respondents want their software vendor to provide the upgrades, improvements, and access to emerging technologies that always keep them one step ahead of their competitors.
The reputation of a vendor is crucial. In the Fintech industry, businesses succeed and fail based on the vendors they choose because delivery to market, customer service, and the quality of their offering depend upon them. Thus, it’s critical to partner with a reputable vendor that has integrity, aligns with the business’s core values, communicates clearly, meets business requirements, and has a shared sense of purpose on what needs to be achieved. With financial services regulatory oversight of the fintech industry likely to continue getting tighter, a vendor that provides compliant and secure software is a nonnegotiable and failing to deliver reliable software is a dealbreaker. For software to be sufficiently compliant and secure, it needs to protect against internal threats, including staff error and internal fraud and theft, as well as external threats that include hacking and cyber criminals.
«We have a policy of supplier management. If we have a specific need, we look at the suppliers which are in the market, we look at sites like Gartner or Infotech and try to grade them. We also have established a parallel process of identifying trends. We identify an area we are interested in, then we pinpoint 3-5 top players and we evaluate them by financial substance, delivery capacity, project track records and the possibility of presence in our country.» - George Demetriades, Centralized Procurement & Outsourcing at Alpha Bank (Greece)
Staying abreast of customer needs and preferences, banks and fintech institutions will need to rely on financial software companies that can keep pace with the industry and build the robust, but agile, digital banking products required.
Collaborate to innovate
Greater collaboration between fintechs and banks is expected in 2023. In a survey conducted by Cornerstone Advisors, almost 90% of financial institutions consider fintech partnerships to be very important to their business, up from 49% in 2019.
Established banks and other financial institutions are looking at the technological innovations that fintechs are bringing to the table. On the one hand, there is the dependability of established banking infrastructure, credibility with regulators and an immense customer base. On the other, there’s the freedom to innovate and the agility to build tailored solutions for niche customer segments. Success is achievable through joint efforts, with each partner doing what he does best.
We also can see more in-depth partnerships between fintech companies forming new joint offerings and innovative solutions. Fintech companies, banks and other financial institutions that are traditionally regarded as competitors partner up in order to extend their business into new customer segments.
"Velmie is partnering with the leading companies to provide enterprise-grade technology for digital asset exchange products. Our white-label platform can be extended in numerous ways to fit specific business cases and build unique offerings. This is the approach chosen to deliver this solution with Exberry to provide state-of-the-art technology that is modular, scalable, and future-proof" - said Slava Ivashkin, CEO of Velmie.
We should never underestimate the power of partnerships. Partnering with reliable companies in a niche field saves time and resources, reduces time-to-market, and helps speed up the business learning curve. Below there are top-3 reasons to use a strategic partnership to grow the business:
To increase the customer base and open up new acquisition channels.
To enhance technology capabilities.
To open up new markets and customer segments.
Velmie together with their partners allows starting of tailored banking products at a low time-to-market. The vendor-agnostic design makes them future-proof and adaptable to ever-changing market conditions.
Conclusion
Current projections are that the fintech industry is likely to grow at a compound annual growth rate of more than 22% a year, increasing from $11.8 billion in 2018 to about $306 billion in 2023. With massive growth comes massive opportunities. The proposed strategy is to take into account all possible threats, to be ready to overcome mentioned challenges and stay open to new partnership opportunities.