David Jarvis is the CEO and co-founder of Griffin, a leading banking-as-a-service provider that helps companies build and launch financial services products. He shares his insights for the year ahead – from the impact of high-interest rates, to digital sovereignty, to the regulatory shifts we can expect from 2023 and the implications for the fintech industry and beyond. According to Jarvis, here’s what we can expect to see in the coming year.
1. High inflation is not going away
We are heading into major macroeconomic headwinds and these winds won’t die down for the foreseeable future. Inflation is being driven in part by the war in Ukraine, but also by wider and more entrenched anxieties about globalisation and national security.
Global supply chains have played a major role in driving down prices, but the pandemic has forced us to recognise that they are also incredibly fragile. The trend towards globalisation is now reversing, with countries moving to make their national supply chains more robust – except a lot of the infrastructure to support this move doesn’t exist today and will require heavy investment. This will continue to drive price increases as countries continue to pour money into shoring up systems that never were and never will be as efficient or cost-effective as globalisation.
2. Tech companies and VCs will need to evolve to survive in a high interest rate environment
If you are under 40 years old, practically your entire professional life has been defined by an economic environment in which interest rates were zero. Right now, we’re seeing the market continue to engage in a substantial amount of wishful thinking about returning to that environment. It’s not going to happen. The zero-interest-rate environment that persisted in the last twenty years was extremely anomalous, and much of what millennials and Gen Z know about the world is going to change in ways we are not well prepared for.
From a funding perspective, we now have a whole generation of venture capitalists who have never had to face a zero interest rate environment. This is possibly why a lot of deal-making is on hold right now – people need time to learn and adapt. With higher interest rates now flowing into their financial models, venture capitalists will need to rethink how they build these models and the implications this could have on their portfolio profitability.
Startups and tech companies must do the same. They need to step back and assess if their current models are sustainable in a high interest rate environment. The ability to secure credit and venture debt is also likely to be affected, and companies need to prepare for this and determine how it could impact their plans to scale.
3. Data (or digital) sovereignty will become the norm
We don’t really have one internet anymore: instead, we have multiple regional nets governed by different laws, regulations, data residency requirements, and data protection requirements that are, in many cases, structurally incompatible with each other. I expect we will continue to see a push toward data sovereignty in the coming year. Data sovereignty refers to information which has been converted to digital form and remains under the laws of the country in which it is located.
China has done this successfully, while the EU and Russia are pushing for it. It’s possible that Western democracies will try to stay in line with each other, but they also might not because the EU sees the US as a threat and is not necessarily interested in playing nicely. In any case, whatever form it takes, the push for data sovereignty is going to be a long-term trend with lasting impacts on the tech industry and on individual users’ experience of the internet.
4. Crypto will become a high priority for the regulators
FTX collapsed by a good old-fashioned bank run. The demise of one of the biggest and ostensibly most “stable” crypto exchanges demonstrates that these businesses are not that unique. In fact, they’re highly susceptible to many of the same pitfalls and vulnerabilities that affect most financial services firms. Traditional financial services firms have a good model for how to handle these risks – they’re well understood, in large part because of financial regulations which require a basic level of mitigation in place to make it harder to take risks that could harm customers. The fact that crypto businesses are so susceptible to these failures – by virtue of sitting outside of the regulatory framework – is both a systemic risk and also very bad for consumers. And so in 2023, I expect an aggressive push to bring crypto into the regulatory framework.
5. Faster regulatory turnaround, but more scrutiny on compliance
The FCA has cleared off their Brexit and fintech boom backlog, and novel business models like open banking are becoming more mainstream. This will result in applications getting turned around much faster and more new fintechs popping up than in the last few years. However, we’ve also seen regulators put pressure on fintechs to be transparent and demand that greater compliance controls be put in place.
With the recent collapse of companies such as FTX, we should expect regulatory changes around transparency and financial record keeping. More specifically, these regulations could become much stricter and more widely monitored. I expect a continuing regulatory trend to make running those kinds of businesses harder. That will flow through to the increased ability to do automated verification, particularly on companies.
6. “Zombie companies” will die
A high-interest rate environment flushes out a lot of “ zombie companies” – which are not viable in this economic climate. When the fintechs need to return an additional 5%-7% a year just to keep up with inflation, companies that have survived on securing cheap capital will die. These will mostly be mid-cap and large-cap companies that are publicly traded. They survived previously by loading up on debt and not actually delivering a return. But when the cost of debt goes up, they parish.
A lot of startups that have terrible unit economics will also die. There will not be funding for the likes of grocery delivery or scooter companies for a long time. The amount of capital that was flowing to companies with terrible unit economics was capital that simply did not have anywhere else to go. But the age of cheap money is over, and the companies – big and small – that depended on it for their survival will suddenly find themselves with no way out.
7. Embedded finance will fully embed
Embedded finance is already here, but it’s really going to take root next year. Companies will be looking for every marginal pound they can get. This is in favour of the embedded finance thesis: “I have this customer relationship, I have data, there is a way for me to both improve the customer experience and monetise it simultaneously.” It is a natural win-win, and I expect companies to continue doubling down on embedded finance for that reason.
Both B2B and B2C businesses will be looking for ways to embed banking and financial services directly into their user experience. Whether it’s an invoicing platform that will offer credit to customers or a Neobank that wants to offer savings accounts to consumers, businesses will be looking for ways to diversify revenue via financial services.
While the year ahead is certain to have its challenges, it’s during economic downtimes that some of the most innovative and successful companies are born. Startups and large corporates alike will need to evolve with the new reality and make smart choices about what they build and how they create operational and capital efficiency. And while this shift in mindset may be challenging, it presents a unique opportunity.
