The Fintech industry had a difficult 2023. Rising interest rates, higher inflationary pressure, mounting delinquencies, and dried-up low-cost funding made it difficult to raise capital, leaving a backlog of IPO-ready companies.
Add to that some big failures in financial services – think FTX and SVB – and it’s easy to see why investors and customers lost confidence. The markets were nervous. Deposits shifted from Fintechs and banks as people chased high interest rates for their savings. And the industry was under a lot of pressure to accept less favorable buyout deals.
In 2024, however, the outlook is brighter. The industry is seeing a significant uptick. But to ensure sustained growth through this year and beyond, there are several challenges Fintechs must watch out for and take action against. With the right strategy as a defense, Fintechs can thrive under the growth opportunity on the horizon.
The Challenges Facing Fintechs in 2024
I see six main hurdles that Fintechs need to overcome this year, which must be navigated as a whole to capitalize on the growth potential 2024 holds.
1. The Cash Runway Dilemma
Many Fintechs find themselves with less than 12 months of cash runway, highlighting the pressing need to balance growth and EBITDA. Navigating this dichotomy is crucial for survival and success.
2. Evolving Revenue Streams
With interchange erosion reducing the amount in fees Fintech companies can earn, the ongoing shift towards revenue models like SaaS from traditional software distribution will continue to gain momentum. Adapting to this is essential for sustained profitability.
3. Escalating Cyber Threats
The increasing prevalence of cyber threats, including deepfakes and voice clones, underscores the importance of enhancing data security and authentication measures. Fintechs must invest in robust cybersecurity frameworks to protect against emerging threats.
4. Regulatory Scrutiny and Compliance
More than 60% of Fintechs pay at least $250k in compliance fines a year, with one-third paying over $500k. Data privacy, fair lending, digital assets, fraud, and chargebacks are just some of the areas regulators are clamping down on. New regulations on Open Banking and AI credit denials have also been proposed by the Consumer Financial Protection Bureau (CFPB) adding another layer of complexity.
5. Customer Retention
With revenue and margin pressures on the rise, retaining customers and acquiring new ones without doling out significant sums of money in acquisition is a critical challenge for Fintechs. Developing new strategies to attract and hold onto Gen Z account holders is vitally important in 2024.
6. Talent Acquisition and Retention
Hiring skilled domain experts remains a challenge for Fintechs. Attracting and retaining top talent is crucial for driving innovation and maintaining a competitive edge.
Although 2024 has brought challenges galore, it has also created many opportunities. The key will be strengthening your core business and operating model while increasing your focus on the customer and user experience at the same time.
Strategies for Fintech Success in 2024
Navigating the challenges above, and grasping the opportunities they create, will enable Fintechs to not just survive but thrive. But how should they go about it?
1. Build Trust
As the cost of acquisition is lower than the cost of building, Fintechs must brace for consolidation as M&A activities increase. In doing this, it’s important to maintain a laser focus on bringing deposits back to Fintechs, establishing credibility, liquidity, and investor confidence.
2. Understand and Retain Your Customers
Understanding Gen Z has been tough for Fintechs and Neo-Banks. Active social media monitoring and plugging data into overall customer journey mapping is important to understand these customers. Implement NBA (next best actions), predictive analytics, and AI/ML-based hyper-personalization models to create tailored offerings and products that attract and retain customers more cost-effectively.
3. Cost Discipline
Stringent cost management – not growth – has been the biggest contributor to profitability for Fintechs. 2024 is the year to prioritize efficiency in your business model by implementing digital accelerators such as automation and artificial intelligence, ensuring SLA compliance, and reducing errors.
4. Invest in Compliance and Regulations
Increase your focus on cybercrime, data privacy, fraud, and compliance. But remember, not everything needs to be built in-house. Explore Regtech solutions that can automate and streamline compliance processes. And consider participating in regulatory sandboxes that let you test and innovate within a controlled environment.
5. Fight Fraud
Fintechs have become easy and obvious targets for Fraudsters. In 2024, it’s essential to bolster your defenses by focusing on authentication measures such as MFA, FIDO2, 3DS, and decentralized authentication to protect legitimate users and weed out bad actors. Participation in Open Banking and fraud networks can further enhance your fraud prevention capabilities.
6. Invest in Cutting-Edge Technology
While some Fintechs have already invested in GenAI solutions, there are many areas you can explore to better leverage this technology and further streamline your operating model. Hyper-personalization, BOT virtual assistants, metaverse-based avatars, and advanced credit scoring are avenues that can drive efficiency, reduce costs, and enhance customer engagement.
7. Become Agile and Scalable
Utilizing industry specialists, BPaaS solutions, and on-demand domain experts can help Fintechs create adaptable teams and operating models that can be expanded easily. These are crucial in responding to changing market dynamics.
8. Build Strong Support Structures
Although it’s often overlooked, building scalable support structures is essential for Fintech companies. Establishing efficient processes and departments for procurement, accounting, taxation, payroll, training, and compliance is key to sustained success.
Resilience comes from sound fundamentals, differentiated and innovative products, and a profitable P&L. In 2024, it’s therefore more important than ever that Fintech’s remain focused on innovation and maintaining a great product story.
By converting challenges into opportunities, you can conquer the evolving financial landscape and emerge stronger than ever. And that’s where Sutherland FinXelerate – a suite of flexible, modular solutions, curated for Fintechs, can help transform your operating model, delivered by a partner that truly understands the needs of Fintechs – can help.