In a landscape being reshaped by the winds of change in 2023, the fintech industry is experiencing a seismic shift due to rising interest rates and the slowdown in funding. Once-generous venture capital investments have slowed to a trickle, forcing fintech companies to recalibrate or pivot rapidly.

For an industry where innovation and agility reign supreme, these new challenges call for novel approaches to keeping a business alive. Some of the survival strategies will include acquisition or partnerships. But this won’t be the case for some fintechs, which will close because of the shakeout.

Some of the key challenges facing fintechs due to the current investment and competitive landscape include:

Adapting to the New Norm: The Monetization Mandate

Gone are the days when fintech startups could focus solely on innovation and growth, postponing revenue – much less profitability – indefinitely. With investment funding becoming more scarce, the urgency to demonstrate a clear path to monetization has never been greater. Fintechs must now accelerate their revenue generation and build their path to sustainability, leveraging their unique value propositions to stand out.

The Darwinian Fintech Ecosystem: Survival of the Fittest

In a world with a surplus of innovative ideas but less investment and funding opportunities, the future of many fintech startups has become precarious. In an industry where there may be 10 competitors all chasing the same thing, perhaps five of them will flame out. The best one of these is maybe lucky enough to survive on its own for a while IF it gets additional funding, the rest of the fintechs may find a home as part of a bank or other larger financial organization. This Darwinian process is fostering a more robust and adaptable fintech ecosystem, as companies must evolve or fade out.

Acquisitions as a Strategic Lifeline

Some fintech startups are finding refuge under the wings of larger financial organizations through acquisitions, and occasionally mergers. These strategic moves offer a lifeline to companies that might otherwise struggle to secure additional funding or sustain operations. Established financial players, recognizing the potential of innovative technologies developed by these startups, are opening their doors to acquisition talks.

The synergy of fintech startups’ innovation and agility with the established infrastructure and resources of larger organizations can be a win-win scenario. Startups gain access to a broader customer base, regulatory expertise, and the stability of an established institution. At the same time, acquiring organizations can augment their technology, accelerating digital transformation efforts and increasing their competitive edge in today’s cutthroat banking and fintech landscape.

The Challenges in Traditional Banking

Surprisingly, where the acquisitions started happening is in the banking industry itself. In the wake of the regional bank failures earlier this year, worried customers flocked to move their deposits to big, “safe” banks. As a result, First Republic Bank became a victim of one of these bank runs, and as the bank collapsed, on May 1, JP Morgan acquired most of its assets.

Regional banks themselves continue to be hammered by the perception of higher risk, facing credit rating downgrades, rising funding costs, and more recently, new U.S. regulations such as raising the level of capital required and increasing the levels of long-term debt a bank holds. According to CNBC, these new requirements might force some banks to have to issue corporate bonds or hold more expensive debt. Morgan Stanley analysts identified five regional banks that may need to raise fresh debt, and who may in the longer term be forced into an acquisition scenario due to the new regulations.

Fintechs Acquiring Fintechs

But the usual acquiring suspects aren’t always the biggest banks. Indeed, some of the more interesting acquisitions in 2023 have happened between fintechs. Early-stage companies with unproven revenue models or not meeting their targets, can find it enticing to consider the prospect of merging with more mature, well-capitalized companies who in turn can beef up their technological prowess or product portfolio through acquisitions.

One example of this: US fintech Acorns*, which empowers its nearly 6 million subscribers with features to micro-invest towards their future, acquired U.K. fintech GoHenry, which offered financial education for kids aged 6-18. The acquisition allows Acorns to continue helping its customers, including children, with money management and investment education (Acorns launched Acorns Early in 2020, which allowed family and friends to invest in a child’s future). At the same time, it enables GoHenry to offer its financial education and wellness products to an even larger audience.

Another example of more strongly-positioned fintechs acquiring other fintechs is the acquisition of Tillful by American small-business financial health platform Nav. Citing a need to develop its own data platform and product roadmap, Nav acquired Tillful for its unique feature set and desire to consolidate its small-business cash flow management tools. This is actually the second acquisition this year by Nav, with the first being Nuula, a Canadian fintech that serviced the small business community.

Finally, one last example of fintech-acquiring-fintech is the June 2023 acquisition by fintech payment processing giant FIS of smaller fintech Bond. Bond is an embedded finance and BaaS player that FIS acquired to fill a gap in its embedded finance services. Terms of the deal weren’t disclosed, but TechCrunch speculated that, “…amid a decline in fintech venture funding in particular, M&A may have become an interesting option for [Bond].”

What’s Ahead

The acquisition wave triggered by the changing funding environment isn’t likely to let up anytime soon. Fintech startups that don’t gain traction on their own will continue to face the challenge of securing funding or finding good homes within larger financial entities, including potentially more financially stable and mature fintechs. However, the acquisition path is not the only trajectory these fintechs may take.

Some fintechs, armed with resilience and innovative solutions, will rise and succeed independently, weathering the storm by demonstrating their value and pivoting their strategies to address new market conditions. Others may face a more unfortunate fate as they face a lack of funding and struggle to gain traction.

* Disclosure: Acorns is a Wildfire Systems client