2023 in review
It’s that time of year when we look back at what’s happened and whether events unfolded as we expected. As the year started, the hangover of high interest rates and cost of living concerns remained. For fintech firms, the persistent macroeconomic uncertainty forced many firms to scale back their ambitions and defer expansion.
Perhaps we should have taken some cues from cinema as to what was to unfold. As Everything, Everywhere, All at Once was bringing home the Academy Award for Best Picture, events were already unfolding that would have an indelible impact for the rest of the year and beyond.
Four days prior to Hollywood’s annual ceremony Silvergate Bank announced it was closing, in part due to the collapse of its biggest customer, the crypto exchange FTX. While perhaps not a household name or with a huge deposit base, it was a significant event.
But it was one that was soon overshadowed.
Two days prior to the ceremony, Silicon Valley Bank, a firm synonymous with supporting early-stage and scaling fintech firms on both sides of the Atlantic, went under, the second biggest US bank failure in history. Such was the potential contagion of SVB that regulators and banks spent a weekend putting together rescue plans. In the UK, HSBC stepped in, buying the assets and, crucially, providing a significant liquidity line.
The tsunami continued when Signature Bank, with $88.59bn in deposits, announced it was closing just two days after SVB. Two of the three biggest banking failures in US history had occurred in under a week.
While some may have foreseen a bank failure, two in the space of a week and of such stature significantly impacted global market sentiment. Just 48 hours later, UBS bought its Swiss rival, Credit Suisse, after the bank acknowledged “material weakness” in its bookkeeping. Such was the scale of concerns around the systemic risk of collapse, the purchase did not require shareholder approval after the Swiss government agreed to change the law to remove any uncertainty about the deal.
So that was March. 31 days that felt like several years.
Thankfully, things did calm down slightly throughout the remainder of the year.
A recent Financial Stability Report from the Bank of England claims that there are no long-lasting effects from these global banking stresses on UK banks, yet uncertainty remains. Could there be broader effects of these failures that are yet to manifest themselves? Given that bank failures occur when there is a collapse in trust, these stress tests are perhaps less important than the effects on perceptions. That is something that will continue to resonate into 2024.
Away from the effects of these high-profile failures, there were several trends that grabbed our attention in 2023.
Recently, the UK Chancellor of the Exchequer delivered his Autumn Statement. Of particular interest within this was the publication of findings and the final report of the Future of Payment Review report, commissioned by HM Treasury (HMT) and led by Joe Garner, former CEO of HSBC UK and Nationwide. Garner was asked to consider how the UK’s retail payment systems and networks need to evolve to support consumers and businesses.
In drawing its conclusions, which we go into in greater depth here, the overriding narrative that emerged was that despite the UK’s current position as a global fintech hub, it is starting to lag behind other nations regarding payment innovation.
Two key points stood out:
- The UK payment regulatory landscape is unusually complex compared to other jurisdictions, and initiatives between regulators are not well coordinated. The most prominent recommendation of this report is for HMT to set priorities and manage coordination between regulators.
- There is a risk for incumbent financial services firms that Big Tech is particularly well-positioned to become dominant in the UK. A number of cautionary statements are made about the successful take-up of Apple and Google payment services and the absence of other widely adopted commercial alternatives.
The Garner Review also referred to one of the other big updates that came into force this year, the APP fraud reimbursement rules. It suggested a formal cost/benefit analysis of the new requirements should be conducted after 12 months of implementation, focusing on any adverse consequences of the regime – for example, any additional friction to the customer journey, increases in first-party fraud or shifting fraud to other ‘non-bank’ rails outside of the regime (for example cryptocurrencies).
Further work will be undertaken to bring together banks, technology platforms, telcos and government departments to collaborate to try and prevent fraud at the source.
With rising interest rates, inflationary pressure, the correction in the crypto markets and more affecting fundraising, investors are demanding more rigorous scrutiny of a pathway to profitability.
As the industry navigates these changes, one thing is clear: fintech is evolving. It is maturing and becoming increasingly focused on delivering sustainable financial results. Gross margin has become far more important than many other measures of how a business is doing, with a renewed focus on recurring fee transactional revenue rather than small amounts of revenue from products that will struggle to make a profit long-term.
The positive news is that throughout 2023, numerous firms, including Allica, Starling and Zopa, reached the milestone of annual profitability, with many others likely to report similar results for their full financial year.
2023 will be remembered as the turning point when profitability and sustainability, rather than the vanity of valuation numbers and growth at all costs, took centre stage.
According to Open Banking Limited, the independent entity established by the Competition and Markets Authority (CMA) to oversee its implementation, Open Banking in the UK now has more than 7 million active users.
One of the biggest developments this year was Apple announcing AIS-based connectivity for its Wallet app, displaying current account balances across a user's connected bank accounts and payment and deposit history. It will also show account balances to users when using Apple Pay for purchases, providing additional detail on available funds before completing a payment that could, for example, push them into their overdraft and incur additional charges.
The first six months of 2023 saw open banking payment volumes double compared to the first six months of 2022. One of the major drivers for this is the UK’s HM Revenue and Customs (HMRC), which processed £2.3bn of payments using open banking in January alone ahead of the tax self-assessment deadline.
This notable increase is likely to be bolstered by the growth and development of Variable Recurring Payments (VRP) that offer “me-to-me payments,” sweeping funds between two accounts owned by the same person, for example, a bank account and a savings account. Open Banking platform TrueLayer announced it is now processing a million VRP payments a month.
While we’re still early in the VRP, momentum around Open Banking payments continues to grow. However, as the Garner Review also noted, for them to become truly mainstream will first require solving some outstanding challenges, namely the economic model and methods for improving and funding consumer protection for Open Banking payments.
While the digital assets sector continued to tackle many issues, including multiple bankruptcies, high-profile cases of fraud (FTX), and regulatory enforcement actions (Binance), the convergence of digital assets into traditional finance is driving demand for new services.
One notable trend was tokenisation, the process of digitally representing tangible, physical assets (such as real estate or commodities) and financial assets (equities, bonds) on distributed ledgers or issuing traditional asset classes in tokenised form. State Street’s report on tokenisation and digital asset regulation highlighted its potential for future growth, emphasising the need for frameworks that balance encouraging innovation and safeguarding investor protection. Furthermore, it underscored that a regulated environment could unlock the potential of digital assets by offering a secure and transparent platform for their issuance, trading and use.
2023 saw the groundwork laid with major banking groups, such as JP Morgan, and investment firms, like Hamilton Lane, developing tokenised funds to better understand the benefits they could deliver. As digital asset teams mature, that development is likely to accelerate over the next 12 months.
So that’s 2023, a year where everything seemed to happen everywhere all at once. In March.