Monetary policies are tightening, inflation is rising, and banks are forced to increase interest rates and fight rising operational costs as economic uncertainties persist. The current economic outlook underlines the importance of change in the financial sector, and technology implementation may be the key to recovery.
Financial technology companies like Swissmoney adapt to rising inflation and aid economic recovery by offering innovative payment services with global reach, high-privacy standards, and swift and cost-effective payments. With technology being the cornerstone for escaping traditional and outdated financial services, the financial system has a new instrument to fight rising inflation.
Read on to learn how, in their struggle to fight high inflation, FinTech companies adapt to market conditions and manage to innovate the financial landscape. We will explore the different FinTech sectors, how they are affected, and the perks and downsides of rising inflation for the industry.
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Inflation’s Effects on the FinTech Industry
With the introduction of technologies in the financial industry, traditional banking faced challenges as FinTech businesses flourished with their innovative approach and cost-efficient services. Digital-first approach financial companies attracted large customer bases as they finally provided solutions for their needs: improved payment systems, globalized financial infrastructure, and comprehensive platforms.
However, recent economic turmoil has shaken the market, creating a challenging environment for many FinTech businesses. Before the fears of an upcoming recession, investor sentiment was prone to making higher-risk decisions, serving as a financial injection for FinTech, thus creating a pathway towards innovation and improvement. As core inflation remains persistent in 2023 and global economic growth is projected to remain low and resilient for the upcoming year, the tides have changed, and financial markets have taken a hit.
The question of whether FinTechs have what it takes to survive during harsh economic conditions finds its answer in continual strive for technological advancement and supreme brand-building efforts. Reevaluating business models and shaping them based on macroeconomic conditions will be necessary measures for companies to address barriers imposed by rising inflation.
Despite the recent setback, 2022 was one of the most successful years for FinTech, as the appeal of investors and consumers towards digital financial solutions remains persistent. In fact, technology plays such an essential role in customers’ decision-making that FinTech companies may have the leading edge in customer acquisition compared to traditional banks. Diversity is another crucial aspect with blockchain, peer-to-peer lending, and swift global transactions fueling user demand.
Impacts of Inflation on Different FinTech Sectors
It is easy to describe FinTech as implementing technology into financial services. However, the diversity in the FinTech industry is broad, and businesses vastly differ in their offerings, products, and services. As a result, an unequal influence of inflation can be observed in each sector, as factors like volatility, impact of interest rates, and adaptability are vital in the final outcome. Below, we explore how three of the leading sectors of FinTech have changed as a result of rising inflation:
Cryptocurrencies and Blockchain
Initially considered a hedge against inflation, the cryptocurrency market continues to struggle after the crypto winter and the macroeconomic conditions in 2022. The bearish run resulted from surging inflation, and with rates falling, we can see how the new digital assets are slowly recovering, with Bitcoin (BTC) up more than 69% year-to-date. FinTech businesses continue incorporating crypto payments into their platforms for swift and transparent payments, but uncertainty remains as the future of crypto regulations is still being determined.
Payments outperform all other FinTech sectors as transaction costs remain nearly unaffected, and the shift towards digitalized payments attracts more users. Cash is king during high-inflation periods, and digital payment apps like Revolut and Swissmoney experience more transaction volumes. Additionally, international trade through cost-effective cross-border payments and globalized transactions are high-demand services for both businesses and customers and assist in aiding the current economic slowdown.
As interest rate adjustments are needed due to inflation eroding the actual value of money, FinTech lending services earn more interest on loans and credits. More customers turn to the fast and straightforward processes of digital platforms, and the demand for lending services increases due to the disproportionate value of salaries and goods and services.
Of course, there is a drawback of high inflation for FinTech lending, like money losing its original purchasing power. Overall, the sector’s outlook is uncertain, as factors like consumer spending and employment rate will be determined in the upcoming months.
FinTech During an Era of Economic Uncertainty: The Goods and Bads
Increased inflation could benefit lenders as people will turn to financing options like credits, which with higher interest rates will give fintech lending services higher returns for the money they land. The concept here is relatively uncomplicated; people’s salaries often cannot increase at the same pace as price hikes. Therefore, consumers must opt for loans to cover their expenses for more costly purchases like cars, technology, etc. In turn, the lender receives higher interest, as not only are the rates higher, but the purchase prices also increase.
Moreover, lower barriers to entry mean more customers will turn to FinTech services rather than traditional banking, as with price increases around all markets, people become more sensitive towards where their money goes. Digital financing providers offer the necessary tools to attract customers when budgeting and financial planning are paramount. Portfolio management tools, personalized credit options, investment education, and advanced payment solutions are perks that will bring even more customers to FinTech companies.
Rising interest rates also have adverse impacts on FinTech companies. Unlike traditional banks, FinTech neobanks rely on investments to keep their business alive and grow. As inflation affects the financial markets, FinTechs will find it harder to find funding options through public listings. Entering the markets for startups will be increasingly complex, and private funding options will be less abundant and more costly.
In addition, Fintech companies went all in while the financial environment was thriving and created an ecosystem where customers received all the perks: cost-effective solutions, incentive programs, rewards and discounts, and more. In times of economic headwinds, to maintain their customer base and avoid bankruptcy, FinTechs may need to reduce costs of customer acquisition and shift their focus toward digital innovation and building brand image.
FinTech industry is facing a dynamic landscape as it navigates the challenges posed by rising inflation and economic uncertainty. While inflation can present both opportunities and obstacles for FinTech companies, their ability to adapt, innovate, and offer value-driven solutions will be crucial in ensuring their continued growth and resilience.