The turbulent first half of 2022 has impacted the valuations of businesses in almost every sector. Fintech has been among the industries hit hardest.

Recent data paints a picture of dwindling financing for fintech firms, with funding dropping 33% quarter-over-quarter (QoQ) in Q2 2022 to $20.4 billion, according to CB Insights research. This, however, fits with a broader trend of lower total global funding, which fell 23% QoQ for Q2 to hit $108.5 billion—the largest quarterly percentage drop in nearly a decade.

Although a decline in fintech funding was to be expected this year, given the record-breaking—and unsustainably high—level last year, economic uncertainty is causing an even greater downturn. Rising inflation, the war in Ukraine, and fears of a looming recession have halted the frenzy of investing, and fintechs will have to tighten their belts for a harsher H2 2022 funding climate. 

Fintech valuations in 2022

According to the New York Times, the S&P 500 notched its worst first half of the year since 1970, down nearly 21% since the year started. Valuations across markets are facing a decline, and it’s unclear when the slump will end. 

Some fintechs are facing devaluations thought to be unimaginable only a year ago, especially buy now, pay later (BNPL) firms and other payments businesses. Klarna, for example, closed an $800 million funding haul at a $6.7 billion valuation, a sharp drop from the $46 billion high it reached in June last year. Stripe’s valuation has fallen 35% from the start of 2022, while shares in publicly listed Affirm are down more than 80% this year. Even incumbents aren’t immune; PayPal’s market cap shrank to just over $110 billion as of August 1, 2022, down from a peak of over $360 billion in July 2021.

Neobanks would also be wise to refine their strategies as valuations drop, shifting their focus from customer acquisition to cost cutting and growing profitability. This means pivoting from offering low-cost or no-fee incentives and high yields to creating new revenue-generating offerings.

Fintech funding in 2022

Global fintech funding dropped by one-third in Q2 to continue a trend of declining investing this year, according to CB Insights data.

Though funding hasn’t dried up completely, the global fall-off in investment reaffirms that many fintechs have experienced a tough first half of the year and is emblematic of the wider decline in financing and deals. The drop in funding from Q1 to Q2 also highlights the influence of external factors—such as mounting recession anxiety—on the fintech market.

Because fintechs experienced a huge year of growth in 2021, investment in the market this year looks low by comparison. In reality, it’s remained robust, especially compared with investment in other sectors and with funding in 2019 and 2020. In this context, the global investment picture remains relatively upbeat, although H2 2022 is likely to be harder on fintechs looking to raise funds.

There’s still money out there for fintechs, but with most neobanks still unable to turn a profit, regulations coming for BNPL services, and a chill falling over the cryptocurrency world, firms must stand out to attract investors.

Fintech trends in economic uncertainty

Investors’ hesitancy to close deals means fintechs have to proceed cautiously for a tougher H2 2022. This leaner second half will give rise to changes in strategies for fintechs looking to stay agile. 

First, we expect fintechs to cut costs, scale back expansion plans, and prioritize profitability over customer growth. To bring in new revenue streams, companies may branch out with product offerings that customers will want to pay for, despite being more cash-strapped. This need to diversify products could lead to an increase in acquisitions of struggling fintechs at a reduced cost.

Lastly, fintechs will be more cautious in seeking funding at the right time. On the one hand, allowing time to improve business fundamentals before seeking funds will lead to better valuations. On the other, funding could keep getting scarcer, and fintechs nearing the end of their runway will get worse deal terms.

Many of these findings have emerged from Insider Intelligence’s Great Realignment webinar, a presentation that covers the ways in which ecommerce, social media, fintech, and other industries are being transformed in this era of uncertainty. To view a recording of the webinar, or to access the accompanying slides, click here.