As we enter the new year, many economies worldwide stand on the precipice of recession.
The UK has already fallen, with leaders in the EU and U.S. (among others) warning that they, too, may soon follow.
Within this context stands fintech.
Despite consumer trust in fintech being reportedly low at the beginning of 2022, data shows that adoption has continued. McKinsey found that almost nine out of 10 Americans used some form of digital payment in 2022, and 30% were planning on using three or more digital wallets.
However, investment has continued to drop from its peak in 2021. Valuations have plummeted, and mass layoffs are rife.
CNBC calls 2023 fintech’s “year of reckoning” can the sector ride out this blip in investor confidence?
Convenience, not trust, seems to have driven fintech adoption
For many, fintech is the answer to the financial industry’s failings. In the wake of the 2008 financial crisis, many startups rose to tackle the financial woes issues of an increasingly digital society.
The solutions created have had a marked effect, improving access to financial services in many areas. The promise of open banking is set to compound these benefits, and the Federal Reserve’s scheduled release of an instant payments system, FedNow, could signal a time of growth for the sector.
However, the existence of trust (or lack thereof) could make a significant difference in its effect.
“We are in a crisis of trust in the world right now,” said Janine Hirt, CEO of Innovate finance at the company’s Fintech for Good Forum.
“Two-thirds of people believe that traditional authority figures flat out lie. As a result, in many democracies, trust in our institutions is less than 50% of the population. We know that trust can be lost very quickly and can be quite slow to regain, as we’ve seen in the 2008 financial crisis. This is a big challenge for fintech because people will not use our services; they will not use new products unless they trust them.”
While adoption has increased in the past few years, trust in fintechs has remained low. Mastercard found in 2022 that 20% of users strongly distrusted fintechs, while only 6% had the same opinion of incumbent banks.
Convenience was found to be the primary driver of adoption- an increasingly digital society desperately searching for quick solutions that best meet their needs.
Despite not understanding or trusting the start-ups that provided that solution, the benefits of a customer-centric, simple digital solution seemed to outweigh the possible risk. While only 20% said they use technology to manage money, 81% of consumers in the US were found to have linked bank accounts to financial tools.
Could fintech lose its advantage?
Projects like FedNow and an increased focus on digital innovation will likely benefit incumbent banks, improving their competitiveness against startups. Fintechs, agile and innovative in their approach, have, until now, held the advantage, providing new, simple-to-use solutions that consumers crave quicker than their incumbent predecessors.
Mainstream adoption, general acceptance of new technologies, and the challenging investment climate could reduce this advantage considerably. The deep pockets and decades of establishment in mainstream society could help institutional players ride the wave of distrust. The employment market, flush with laid-off talent from downsizing startups, may also be favorable.
The last year also brought multiple knocks to confidence in the trust of the fintech startup. Cryptocurrency companies’ failings and Congress’s PPP fraud report seem to be painted as shortcomings of the whole fintech sector. Tales of failing unicorns and social media’s barrage of complaints against neobanks’ account closures haven’t helped matters.
Experts are poised, foretelling months of continued strife for start-ups, and the companies themselves are nervous.
However, Edelman found in their 2022 consumer trust index that, as a whole, distrust was mainly focused on traditional figures of authority- governments, media, and CEOs. A lack of trust in traditional institutions and authority may be fintech’s gain.
“As a generation, we might trust banks more because it’s the way we’ve been, and that’s also what banks have been counting on, the fact that we are not moving,” said Sophie Guibaud, Co-Founder of Fiat Republic during a webinar hosted by Weavr. “I think the new generation is more inclined to trust brands they love.”
“My second point would be answering and supporting customers in the customer service experience. It all starts with that. When you think your money is safe, whether it is or not, it’s all about communication. Then the trust will be around.”
Fintech has traditionally been seen as adopting a more “customer-focused” approach. A focus on multi-channel customer service and a “friendly” user experience has been widespread, differentiating them from age-old institutions. While traditional institutions are catching on, if Endlemen’s Index is to be believed, the trust built by the sector’s use of this approach could withstand 2022’s knocks of confidence.
Hirt has a similar opinion, stating that fintechs could be critically positioned to build trust in the broader financial landscape. “Trust is an area where the financial innovation community could have a real impact,” she said.
“At the end of the day, so many (fintechs) have created their businesses by ensuring that the consumer is at the center of that proposition. They do what they do to make things better for the end client and consumer.”
“That will go a long way towards rebuilding trust in financial services and trust in our broader sector and institutions.”
Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.
Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.