Research | Fintech

Inflation: Fintechs Eye the Consumer Spending Divide

The future of fintech was in focus as industry leaders, tech innovators and investors gathered for our annual fintech conference.

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By Daniel Perlin
Published July 29, 2022 | 3 min read
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Key Points

  • Most fintechs report little change in consumer spend or client demand so far, despite surging inflation.
  • However, amid evidence that spend among lower-income consumers is faltering, fintechs most exposed to these client groups may find their business affected.
  • Omnichannel shopping is becoming the post-pandemic norm, so fintechs confined to one payment channel may be at a disadvantage.
  • Despite recent volatility in cryptocurrencies, the market is being embraced by major credit card networks and offers potential growth opportunities.
  • Fintech investment has cooled slightly since the feverish market of 2021, but M&A prospects may revive if private company valuations become more realistic.

Steady state – so far

Companies at the conference were generally positive about state of current business. While they did not rule out a future slowdown, most fintechs have not yet experienced big changes in consumer spending or client demand.

In fact, rising inflation is currently benefiting the sector, since many revenue models are based on a percentage of transaction value.

However, prolonged inflation may ultimately curb consumer spending, as outlined in more detail below. In combination with foreign exchange rates – several companies noted the potential for the recent strength in the dollar to put pressure on results – which could squeeze fintechs’ margins.

Consumer split starts to show

Data suggests an emerging divide in consumer behavior that could have significant implications for fintechs.

While most consumers emerged from the pandemic with their financial health bolstered by increased savings, government stimulus support and asset appreciation, activity is now starting to diverge.

On the one hand, affluent and middle-income consumers are continuing to spend. Their discretionary outlay is shifting towards experiences and hospitality.

For example, global leisure flight bookings were up by 25% over 2019 levels by the end of April, according to Mastercard. Short- and medium-haul flights showed similar spikes. Meanwhile Visa has noted growth in restaurant spending over $100, while lower-spend visits have remained flat.

Lower-income consumers, however, are starting to shift to more affordable purchases as inflation bites. The pressure is likely to be maintained on essential expenditure items: food input costs continue to rise, and most states have seen double-digit year-on-year rental increases.

Reports suggest overdue debts are rising on credit cards held by consumers with low credit scores, while subprime car loan delinquencies hit an all-time high in February. This could suggest a trend for overextended spending among low-income consumers.

Many fintechs are focused on serving less affluent consumers who were bypassed by traditional institutions. Those companies with higher exposure to these groups may suffer greater impact if the economy deteriorates further.

However, there is also potential opportunity, since fintech companies that provide value and soften financial burdens could see increased demand.

Post-pandemic shopping habits shift

Some fintechs will also be affected by shifting trends in consumer channel choices, as the effects of the pandemic on shopping habits start to ebb.

As consumers return to physical stores, many companies have noted a slowdown in ecommerce spending. Extensiv’s Market Insights index, for example, has recorded a 27% year-to-date decrease over 2021, with only Amazon bucking that trend. Mastercard’s SpendingPulse data also shows total ecommerce down year-on-year for March and April.

These changes are no surprise. They suggest consumers no longer see a significant difference between online, instore or omnichannel shopping. Companies focused solely on either physical or online payment could find themselves at a disadvantage if this trend continues.

Payment growth prospects in crypto

Investor interest in cryptocurrency culminated in the peak $3tn industry cap value in November, before the market slumped again. Meanwhile, NFTs (non-fungible tokens), DeFi (decentralized finance) and web3 (a blockchain-based version of the internet) have entered common conversation, keeping the market in the news.

The crypto ecosystem was intended to disrupt the major card networks; in the event, those networks are positioning themselves for major roles in it. Visa and Mastercard enable consumers to access the crypto economy, while embracing blockchain within their own payments infrastructures. They also support crypto through a variety of value-added services spanning fraud and compliance, API connections, and consulting.

Despite recent volatility, we believe the crypto industry offers a meaningful growth opportunity across the payments ecosystem.

M&A prospects depend on value reset

2021 was a record-breaking year for fintech investment. Total investment in the market – including venture capital, private equity and cross-border M&A – increased by 68% year-on-year to $210bn, according to KPMG.

This year has seen the market cool somewhat. In the first quarter of 2022, investment was down by 18% over the previous quarter, according to CB Insights – though still up by 5% year-on-year. At the same time, the number of fintech unicorns in March was 267, or 25% of all unicorns compared to 104 (15%) a year earlier.

At the conference, several companies noted that private market values have yet to reset with those of comparable public companies. If that gap closes, we could see more M&A activity over the next year and beyond.

This content is based on commentary and analysis from RBC Capital Markets’ Financial Technology Conference hosted in New York, NY on June 14, 2022. For more information about the conference, please contact your RBC representative.

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