What the market slump means for payments tech

Financial technology firms have had a bad year, with nearly constant reports of sharp stock declines or cratering valuations for unlisted firms. But will the pain in the financial markets halt the dramatic pace of innovation?

About a half trillion dollars has been cut from the valuation of fintech firms so far in 2022, according to CB Insights, which based its estimates on the current valuation of the publicly traded fintechs it tracks compared to their peak valuation (most valuations peaked in recent years). While not all fintechs serve the payments industry, declines have hit point of sale credit firms, cryptocurrency companies and even mature digital payment companies — impacting mobile payments, digital assets, buy now/pay later and other hot trends in the payments industry. 

"It's an overdue correction," said Eric Grover, a principal at Intrepid Ventures.

Low Federal Reserve interest rates contributed to easier access to credit, and valuations that became too high, Grover said. "Investors and entrepreneurs attracted by payments market fundamentals and the opportunity to create real value, and of course plenty of hype, fueled payments fintech valuation inflation." 

The average share price of listed fintechs that CB Insights tracks has fallen about 50% in 2022, compared to a decline in the overall Nasdaq index of about 30%. The cumulative capitalization of fintechs has fallen $156 billion in 2022, or a $460 billion loss (from about $900 billion) if each fintech's current price is compared to its all-time high, according to the Financial Times.

But that doesn't necessarily mean there will be less innovation, Grover said. 

"Bringing highflying fintech valuations closer to terra firma doesn’t change payment-market fundamentals," Grover said. "It’s global. It’s growing. Small enhancements to payment systems can be worth a lot to consumers, merchants, banks and tech firms."

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While it's not clear whether lower valuations will hurt payments technology development, part of the correction is based on mission creep, according to Christina Ross, CEO and founder of Cube, a financial planning and analysis firm, who says that problem can be fixed.

Many fintechs, particularly in the buy now/pay later space, have been trying to diversify their sources of revenue in a bid to stay competitive. Some may have reached too far, according to Ross.

"What we're seeing is a course correction in terms of softening the oversized expansion of scope. Some firms have been asking, Why just manage payments when you can also offer credit cards?" Ross said. "This correction will be a good thing long term, so that these companies can focus more on their core offerings and continue to build products with a clear go-to-market strategy."

The payments industry was already in a state of near-constant innovation before the pandemic caused a rush to e-commerce — the 2010s saw the adoption of mobile wallets and contactless payments, for example, bringing dozens of new payment options to an industry that had been largely static for decades. Later on, the growth of cryptocurrency and other digital assets created new avenues for innovation.

All of this technology matured rapidly during pandemic restrictions as a more mainstream audience joined early adopters. Consumers concerned about their finances during the crisis flocked to buy now/pay later and early wage access, products that had previously been for niche audiences. Valuations for the technology companies that provide these services jumped quickly.  

But that trend has turned in 2022. Worries over a new economic downturn, along with lingering supply-chain issues that followed the early stages of the pandemic, caused a broad market correction. Combined with Russia's invasion of Ukraine, a retrenchment in fintech valuations became inevitable.  

"Of course there is linkage between the stock market, the economy, and dollars for venture funding, so a correction shouldn’t come as a big surprise," said Tim Sloane, vice president of payments innovation at Mercator Advisory Group.

BNPL lenders have been particularly hard hit, given regulatory and economic pressure. BNPL systems were sold as a huge innovation that threatened reigning payment systems, according to Grover. 

"Short-term consumer credit has been around for at least a century," Grover said. "There’s always demand for consumer credit, particularly if it’s fee free. Few if any BNPL systems are profitable. While they’re not going away, the entire sector was grossly overvalued."

The budget adjustments that follow the reduced valuations will likely reduce money spent on marketing instead of product development. Fintechs will continue to focus on tangible problems such as friction in payment processing, risk, or innovation that makes it easier for financial institutions to connect to each other to pair payments with other services. 

"While this correction might decrease the marketing noise a bit, the venture-backed companies will try hard to shift marketing dollars over to development so they can keep moving forward," Sloane said. "This might also give traditional financial companies an opportunity to focus on strategic areas and catch up."