The “Crisis as Usual” Era is Forcing Fintechs To Reinvent Their Business

The prolonged fallout from COVID-19, geopolitical tensions, and an unstable economic landscape plagued by rising inflation are creating the risk of a global recession, taking a toll on fintech companies by triggering a funding crunch while simultaneously driving up expenses.

This is prompting the start of an era of “crisis as usual”, consultancy Ernst and Young (EY) says, and is forcing companies in the space to re-examine their strategies, reduce operational costs and refocus on their core value propositions.

In a new paper produced in partnership with Singapore government-linked company Elevandi, EY outlines key insights drawn from presentations of industry experts and professionals during the 2022 edition of SFF, sharing critical recommendations for fintech companies to not only ride out the storm but also take advantage of increased digitalization in the Southeast Asian region.

According to the paper, despite economic uncertainty and a challenging political landscape, fintech companies have continued to see impressive growth and increasing maturity over the past year.

As digitalization continues to take over Southeast Asia, demand for fintech solutions, especially embedded finance, will only grow, opening up new opportunities for companies that are agile enough to adapt to market changes, the paper says.

A focus on financial discipline

To succeed in this landscape, business leaders must go back to first principles and ditch proxy measures of success like fundraising and valuations, focusing instead on being resilient under any circumstance, the report says.

This will require them to improve their performances by streamlining costs, rethinking their capital allocation strategies and adopting more rigorous financial discipline.

While in 2021, the focus for fintech startups was growth at all cost, the current landscape is shifting priorities towards profitability and sustainable growth.

Shailendra Singh, the managing director of Sequoia Capital India and Southeast Asia, sees the current environment as a great opportunity, stating during a presentation at SFF 2022:

“Nothing can be better in the current environment than for founders to embrace first principles thinking. Founders should push themselves to be best in class and build a truly great economic model.”

Optimizing tech investments

With cloud services becoming more expensive and tech budgets continuing to rise, fintech companies must focus on optimizing their tech investments and make sure that this increased spend is put to the best use, EY warns.

Joanne Hannaford, chief technology and operations officer at Credit Suisse Group, believes soaring costs are due to companies failing to give their developers the tools they need to be productive. She blames this partly on cloud strategies, stating during SFF 2022:

“Many early cloud adopters become dependent on a single cloud provider, trapping them in an expensive cost model without providing access to all the cloud tools they need.”

To overcome this issue, JP Morgan Chase is taking a multi-cloud approach that enables developers to leverage all the public cloud providers for its solutioning.

“We try to leverage platforms to abstract away some of the underpinnings that people don’t really need to understand and the elements that would tie them into a particular cloud provider,”

Andrew Lang, CTO of JP Morgan Chase, said during SFF 2022.

Building trust

Fintech companies are renowned for challenging the traditional financial sector by empowering consumers with better choices and by providing superior customer experiences. They must now focus on building trust after customer acquisition and throughout the entire customer lifestyle, EY says.

This can be done by introducing strong privacy policies and features, such as identity theft protection and control over data usage, it notes. These features are particularly relevant in Southeast Asia where more than two-third of respondents polled by EY as part of its NextWave Global Consumer Banking Survey named privacy and trust among their top priorities.

These “brilliant basics”, including fast and smooth client onboarding, low-cost transactions, and advanced privacy and security features for trust building will continue to play a fundamental role in retaining customers, EY says, especially at a time when competition is ramping up in the financial world.

The embedded finance opportunity

Around the world, companies from varied sectors are integrating financial products into their value propositions to enhance their offerings, provide a more seamless customer experience and differentiate from competitors.

Fintech companies can help non-financial companies reach these goals by providing financial services that can be seamlessly integrated into non-financial value chains, EY says.

This integration, also referred to as embedded finance, is already helping car manufacturers offer subscription services, enabling online retailers to provide short-term financing, and allowing telco companies to charge the cost of movie rentals and other content right to their customers’ phone bills.

Fintech companies must tap into the embedded finance opportunity by understanding their role within this new ecosystem and continuously look for new opportunities to leverage this further, it says.

One company that’s excelling in this strategy is Tencent, a leading Internet, technology and entertainment company from China. Tencent’s ecosystem strategy focuses on how the company can link its capabilities with partners’ capabilities and innovate together. It has been central to the company’s success and is still at the heart of its growth plans, EY notes.

Prioritizing governance and compliance

Advancements in technology and the rise of fintech have forced regulators to constantly legislate to keep rules relevant, imposing a considerable compliance burden on many companies.

A lot of fintech companies are struggling to keep up with the changing regulatory landscape, finding it challenging to identify the nuances, synergies and bespoke controls needed to satisfy local regulatory expectations.

According to Sequoia’s Shailendra Singh, fintech companies that invest early in governance benefit disproportionately because regulators and investors view them favorably. Oftentimes, tech founders don’t build governance muscles early enough and find themselves in a predicament down the road.

“Technology companies are built to scale very quickly, with low regard for regulation,” Singh said during SFF 2022. “[They] may try to ignore that, go for very high growth and run into trouble … As investors, we want to see independent board members, ex-regulators on your board, a very strong CFO and highly automated compliance processes.”

Featured image credit: edited from Freepik

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