How the rise of managed services is driving the resurgence of fintech
The fintech industry continues to battle with unprecedented headwinds in its efforts to strike growth, cultivate innovation, and cement its place firmly within the traditional spheres of finance.
Fintechs are quickly coming to recognise the power of managed services in propelling the sector’s revival
And while many assumed that nothing could prove more challenging than the global pandemic of 2020, those that persevered into the aftermath were met with a tough macroeconomic landscape and dwindling levels of VC funding that have seriously impacted the sector’s growth.
Here, FinTech Futures evaluates how the evolving macroeconomic conditions of the past 24 months have placed a chokehold on fintech-born innovation, the wider consequences of this downturn, and how, through a technology-powered tussle, the brightest and boldest fintech players have managed to break free.
The not-so-roaring 20s
When the Covid-19 pandemic hit in March 2020, the financial industry was forced, almost overnight, to shift to entirely digital delivery models.
On the ground examples of this switch include the launch of Smart Mobile Onboarding by HSBC in China that April, and the launch of similar online portals by Metro Bank and UK challenger Starling Bank later that year.
The rising necessity for digital connections gave rise to new opportunities for fintechs and their technical expertise, which in turn powered a significant growth in fintech investment.
Notable fintech funding deals to emerge from this era include Greenlight’s $215 million Series C, Robinhood’s $660 million Series G, and the $650 million in equity funding secured by Swedish buy now, pay later (BNPL) fintech Klarna.
However, as the pandemic’s grip on the world loosened around late 2021 and into early 2022, global fintech investment levels also began to fall.
Before long, investments centred on providing a resolution to the barriers presented by Covid began to fall out of favour.
This struggle was best quantified in data presented in a report published by leading digital transformation company Sutherland Global and research firm Everest Group in 2023.
The report found that global VC-backed fintech financing peaked in Q4 2021 at $38.7 billion, before tumbling down to just $10.7 billion a year later.
An NCBI study further suggests that 75% of fintechs failed to weather this increasingly turbulent environment.
The age of the agile
Post-pandemic fintechs have proven to be some of the most agile, exemplifying the principle of survival of the fittest.
In the face of reduced investment flows, top performers often distinguished themselves with first-rate operational efficiency.
However, the challenges fintechs face in this arena vary by size, as detailed in the Sutherland Global and Everest Group report.
Validation stage fintechs – those amid Seed and Series A funding rounds with up to $300,000 in annual revenues – will often focus on building trust and brand credibility, while also ensuring watertight security and compliance.
Scale-up stage fintechs – where Series B and C funding rounds are actioned and annual revenues up to $1 million are realised – will prioritise consistent service delivery, customer base expansion, and establishing a global footprint.
Maturity stage fintechs – where Series D funding rounds raise in excess of $250 million and over $1 million in annual revenues are achieved – emphasise stringent compliance and leverage established frameworks to further realise sustained growth and market leadership.
Despite these differences, fintech across all stages aim for maximum market disruption, driven by innovation, nimbleness, and increased third-party relationships.
Potential engagement models
Third-party service providers have proved essential to the post-pandemic fintech revival, enabling players across the industry to focus on core competencies and advance through their growth stages.
There are a number of ways in which a fintech might intersect with a third-party provider, as the Sutherland Global and Everest Group report goes on to outline.
The fresh-faced fintechs entering the validation stage will typically rely on providers to enhance their customer experience with market-validating technologies like know your customer (KYC), customer due diligence (CDD), chatbots, and multilingual services.
Loan servicing and origination solutions also come into play here, which work to automate operations without incurring a proportionate rise in fixed costs.
With scale also comes outsourced payment processing, collections, and predictive analytics, which work together to support an expanding customer base.
When arriving at the maturity stage, fintechs will seek to adopt more advanced solutions for regulatory reporting, fraud screening, and loan underwriting to compete with Big Tech firms and increase their handling of digital transactions.
Recently, these differing engagement models have all received additional gains through the rise of artificial intelligence (AI) and cloud-based, data-driven solutions.
These advanced technologies have evidenced an ability to complement every stage of the fintech maturity lifecycle, empowering all manner of mechanisms, procedures, and processes with an elevated level of efficiency.
Sumit Chopra, vice president and head of customer success, banking, and financial services at Sutherland Global, tells FinTech Futures how AI’s astonishing rise has played out in practice.
“During my over eight-year tenure at Sutherland Global, a leading managed services provider, I’ve witnessed first hand how AI and data-driven solutions have not only enhanced efficiency across all levels of operations, but also enabled the delivery of more tailored, effective and empowering solutions for fintechs to navigate and thrive in today’s dynamic market landscape.
“Internally, AI is enabling fintechs to achieve better compliance, regulatory requirements, and lower operating costs than ever before, while also powering data analysis and application to new heights. However, adoption is currently mired by concerns around analytical bias, replications, and hallucinations, which still require LLM model maturity.
“A managed service provider like Sutherland can help fintechs overcome these hurdles by offering expertise in compliance and risk management, ensuring that AI implementations meet all regulatory standards while also delivering accurate, targeted, and precise results.
“Additionally, we can provide scalable AI and data solutions that not only optimise operations, but also drive innovation and growth, allowing fintechs to stay competitive in an ever-evolving market.”
Managed services and the fintech revival
The relationship between fintechs and third-party providers is, in essence, an active realisation of the best of both worlds: the famed agility of fintechs meets the boundless benefits of outsourcing.
But as competition intensifies, top performers are quickly coming to recognise the power of managed services in propelling the fintech revival.
With optimistic investment trends pushing through to the present day, many fintechs are placing their best capital forward to ensure long-term survival.
One major point of focus for this investment is strong and consistent operational delivery, the necessity for which was recently reconfirmed by the significant CrowdStrike outage of July 2024.
Managed services can enable fintechs to reinforce the reliability of their operations by outsourcing their management to a dedicated body, while securing brand reputation in the process.
These operations then in turn also stand to benefit from the modular delivery models advocated by third-party providers, giving rise to more personalised experiences while also ensuring that costs are kept to a minimum.
This benefit goes on to lend itself to continuously shifting regulatory adherence and the mitigation of ever-threatening fraud spikes, two leading concerns for fintechs across the maturity lifecycle.
Designating this litany of factors to the reins of managed services serves as the ultimate lifeline for fintechs to focus every effort on core competencies and innovation, and ride the waves of the industry’s latest rebound to the fullest potential.
Sutherland Global notably elaborated on the strengthening relationship between fintechs and managed services providers, as well as the consequences for the wider industry, during FinTech Futures‘ latest webinar – Fintech rebound: unveiling opportunities for 2024 and beyond.
Joined by Everest Group’s practice director, Dheeraj Maken, Chopra shared invaluable insights into the driving forces behind the sector’s compelling rebound. Delve into the full session below:
