Fernway DiarySM

Aug 04, 2022

In December 2020, The World Economic Forum’s Global Fintech Market Rapid Assessment Study gathered data from 1,385 fintech firms operating in 169 jurisdictions worldwide to assess the impact of the COVID-19 pandemic on the fintech market and the industry’s response. In that study all but one of the fintech verticals reported growth in the first half of 2020, but follow-up was needed to see if the trend continued throughout the pandemic. To that end, the Global COVID-19 Fintech Market Impact & Industry Resilience Study has been jointly published by the Cambridge Centre for Alternative Finance at the University of Cambridge Judge Business School, the World Bank Group, and the World Economic Forum to examine the effects of two years of lockdowns, vaccination programs, varying government responses, and other effects of the pandemic on the fintech sector.

The 2022 study gathered data from 1,448 fintech firms operating in 192 jurisdictions. Overall, the data showed that fintech showed remarkable resilience throughout the pandemic. However, that broad trend was not consistent across geographies and verticals.

Understanding Pandemic-Era Fintech Growth

The study found that all verticals except one grew at a faster pace than initially reported in the Rapid Assessment Study. However, there was a significant difference in performance among firms operating in advanced economies (AEs) versus those in emerging markets and developing economies (EMDEs). Those in AEs dominated in terms of both transaction volume and growth, except in digital payments, where growth rates were higher for firms in EMDEs. Digital payments were the largest sector worldwide by transaction values (63{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of all retail-facing fintechs).

Data from the study suggests that more stringent COVID-19 lockdown measures corresponded to faster fintech growth, with respondents reporting greater increases in transaction values. Participation as distribution partners for government relief programs was also shown to be a driver of some activities for retail-facing firms. This suggests that a digital delivery model for financial services was suited to the unique challenges of the pandemic.

Similarly, study data points to the potential for fintech to contribute to greater financial inclusion among groups traditionally having trouble accessing financial services, including women, low-income households, and small and medium-sized enterprises. For example, digital payment firms reported that their proportion of low-income clients was 55{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} globally and 73{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} in EMDEs. However, respondents pointed to the need for more regulatory support, especially in EMDEs, to continue to advance financial innovation while mitigating potential risks.

The Changing Funding Market

Despite its strong showing during the pandemic, the fintech sector is now facing the same headwinds as the rest of the global economy: rising interest rates, inflation, and weakening consumer confidence. While it is too early to tell what long-term impact these factors might have, there are already signs that fintech is in the midst of bracing for a market adjustment.

With valuations that were inflated due to the overheated funding market of 2021 now falling, numerous fintech firms have laid off staff in 2022, including Amount, Wealthsimple, Klarna, Curve, Gemini, Nuri, and BizPay. This is part of an overall trend in the tech industry; as reported in Fintech Magazine, US technology and crypto companies laid off 4,044 employees in May 2022, more than in the previous four months combined. However, these staff reductions have in some cases been cast as proactive adjustments to account for changing market conditions, intended to help firms weather the near term without needing to seek additional funding. Fintech investors surveyed by TechCrunch in July confirmed that in 2022 investors were proceeding with more caution than in 2021; while deal-making has not ceased, it has slowed considerably, with investors taking more time to perform thorough due diligence before making funding decisions.

Weathering Challenging Conditions

Putting in place effective corporate structures and obtaining timely expert advice enables startups to position themselves for continued growth and future funding rounds during tough market conditions. Fernway Solutions offers a full range of advisory, corporate structuring, tax planning, compliance, and accounting services to ensure your startup has what it needs at each stage of its growth.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.