2023 US Banking Technology Market Report – Startup Edition

Introduction

Once the would-be industry disruptors, banking tech startups are now largely on the defensive. They are keenly focused on reaching profitability to win back investors that soured on growth stocks once the Federal Reserve started hiking interest rates. This is a major reversal in mindset for the tech industry, which has historically prioritized growth over profits.

Some banking tech startups have already achieved profitability and can likely weather the storm. But the rest will need to trim expenses, which many have done by reducing headcount. We also expect startups to slash their advertising budgets if they have not already.

On the revenue side, neobanks have proven their ability to rapidly gather deposits. But now, if they want to become profitable, we think they must better monetize them. Increased lending is the best avenue, in our opinion, though startups must be careful to avoid too much credit risk. Some digital lenders have reduced originations for that very reason, becoming more selective about the loans they make. Enterprise software companies have different choices to make, but they are not a major focus of this report.

We think much can be learned from the past to predict the future. As in the dot-com crash in 2000, we expect a wave of industry consolidation in 2023 and 2024, with some companies throwing in the towel and others selling their operations at a significant discount to their peak valuations. We expect heightened M&A volume in 2023, though the deal sizes will likely be small, and a fair portion of those transactions will probably be asset deals rather than whole-company acquisitions as buyers have more power to dictate deal terms. To the extent startups seek to retain their independence, past cycle busts show it is exceedingly difficult for unprofitable companies to stay afloat.

How long the rout will last is anyone’s guess. But the Nasdaq peaked in March 2000 of the dot-com boom and did not bottom out until October 2002, at which point it had lost 78% of its value. Assuming a similar situation today, the Nasdaq peaked in November 2021, meaning tech stocks might not recover until June 2024. An index we constructed of recently public U.S. banking tech companies peaked about a month earlier than the Nasdaq, and it has lost 99% of its value since then.

About the Report

This edition of the U.S. Banking Technology Report provides insights into the health of fintech startups that specialize in traditional banking activities and predictions on how they will strategically navigate the current environment. While there are many types of companies within the “banking technology” category, this report focuses primarily on neobanks and digital lenders. In addition to being some of the most well-funded and highly valued startups of the past decade, they also pose the most direct competition to incumbent banks. Broadly speaking, to consider inclusion, a banking technology company must be tech-forward and investing heavily in cutting-edge digital products and services, either for clients or their own back-end operations.