Payments and FinTech companies are feeling the impact of the global economic downturn. From job cuts to collapsing crypto firms, 2022 has been an annus horribilis for the sector, especially relative to 2021. But what should fintech leaders focus on and prioritise to safely navigate this looming recessionary period?
In 2022, investor mindsets have pivoted from rewarding growth at all costs to a focus on profitability and shorter time horizons. So it is of course totally appropriate and expected, given the economic climate, for firms to focus on productivity and management of expenses in short term. But fintech leaders must in parallel also look ahead and plan for an accelerated exit as and when the recession fades and economic confidence and growth is restored. Let’s remind ourselves when that might be.
Learnings from previous recessions can provide some guidance as to what to expect. The commonly held definition of a recession is two successive quarters of negative economic growth. On this basis, in the UK there have been 4 previous recessions over the past 40 odd years to 2022.
They were 1980, 1990, 2008 and 2020. Discounting the COVID-induced recession which only just lasted the mandatory 2 Qtrs to qualify, all three previous recessions in this time period lasted 5 Qtrs or 1 ¼ years. The 2008 recession was the deepest by far, with a peak Qrtly contraction of neg 2.2% and three consecutive Qtrs of greater than neg 1.5% contraction.
The US has shared a fairly similar recession profile during this period, but it also registered an additional 5th recession from March to Nov 2001. Relative to 2008, this recession was very shallow, with a peak-to-trough GDP decline of only neg 0.3% versus neg 5.1% in 2008.
Eurozone countries also share a similar recession profile. However, for structural reasons, recessions tend to hit later and are shallower than in Anglo-Saxon markets, but historically post-recession economic recoveries have been much slower and bumpier with less linear growth trajectories. As a side note, the 2008 recession across Europe was a bit of an exception. In fact, the global recession was first seen in Europe with Ireland falling into recession in mid-2007, followed by a prolonged two-year-long recession across the region and culminating in a financial crisis that tested the single currency area’s economic foundations and political unity.
So the key learning from past recessions, is that whereas at a global level business cycles are correlated, recessions typically play out differently depending on the market or region. Historical perspectives aside, many market commentators are keen to point out that the current economic situation is likely to result in a different type of recession – certainly compared to 2008.
Banks and corporates alike have spent the past decade since the financial crisis building a huge amount of resilience into their balance sheets designed to withstand a 2008-style credit crunch economic shock. As a result, balance sheets are much stronger today, and making comparisons with 2008 is less helpful.
In UK and US, the recessionary period is forecast to last the typical 4 or 5 quarters, so most of 2023, before growth is expected to return during 2024. But it is of course hard to predict, and it is feasible that due in part to the balance sheet resilience, the current recession may be shallower and shorter than expected. But on the other hand, due to global political instability, including a destabilizing and unpredictable war in Europe, economic volatility and economic confidence may be with us for much longer.
Given these hard-to-predict variables, as payment and fintech leaders develop plans for an exit from the recession, they should spend time understanding different potential outcomes across the markets they operate in and assess how these might have an impact on strategic goals. Inspired by the stress testing requirements imposed on banks post the 2008 financial crisis, payment and FinTech’s are well advised to develop more robust scenario modelling capabilities as a complement to normal more rudimentary financial forecasting processes.
Rising M&A activity is an important market signal and potentially an indicator of an earlier-than-expected end to the recession. Acquisitions will start to gain momentum as company valuations bottom out. We can expect strong activity due to corporate balance sheet resilience but also from the private equity and venture capital industry which is awash with so-called ‘dry powder’ or deployable capital.
In fact, there is an estimated $3.6trn of deployable private capital (including buyout, VC, growth and real estate) which is the highest level in history, and three times the level of deployable capital at the start of the 2008 financial crisis.
Within the fintech space, Finch Capital research suggests that deployable capital among fintech investors is currently also at an all-time high at around $28bn.
Radboud Vlaar, managing partner at Finch Capital says that “After many years of impressive growth, perhaps overheated, there is no doubt that a worsening macroeconomic situation and tightening money supply are weighing on the fintech sector. This doesn’t mean that funding has dried up, simply that investors are becoming more discerning and price sensitive.”
He goes on to suggest that “despite difficult near-term prospects in the economy at large, a new normal level of activity will resume in FinTech over the next 12 to 18 months, with a focus on long-term sustainability”.
In these uncertain times, payment and fintech leaders should of course focus on productivity in the short term, but planning for an accelerated exit in parallel is a must.
The dry powder argument is then a case in point in terms of exit planning for payments and Fintech leaders. An M&A scenario should be thoroughly investigated and understood in parallel to the often-preferred initial public offering (IPO) route.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).