The entrepreneurs who believe that big challenges present big opportunities have found themselves in the right place at the right time. With inflation running hot and the Federal Reserve raising rates, small business confidence has never been lower. Over 70% of small business owners taking part in the CNBC/SurveyMonkey Small Business Survey said the U.S. economy is either already in recession or will be before the end of the year. What is felt on Main Street is almost always felt in the homes that surround Main Street.
According to Pitchbook’s Q2 Fintech Report, VC investment in fintech companies fell nearly 18% in Q2 compared to Q1. This has ratcheted up the intensity in what was already a highly competitive environment, as companies vie for a diminishing pool of funding and an increasingly anxious base of consumers.
See the Sun through the clouds
To see the opportunity, begin by accepting that recessions are a cyclical and unavoidable part of business. In these valleys, leaders who are flexible, act quickly and narrow their focus are often rewarded. Recognizing that your business doesn’t operate in a vacuum is also key. Just as you are making adjustments to improve operational efficiencies in your business, consumers are also changing their behavior. Spending and savings patterns will likely change, and consumers will place greater value on financial products and services that help them weather the economic storm.
Focus breeds success
As with most challenging times, those that stay focused and strategic have an opportunity to find deeper customer connections. The three key elements for fintech success in recession are strengthening trust, being agile, and staying flexible to take advantage of changes in consumer behavior.
Trust
In the article, “Begin with Trust,” published in Harvard Business Review, X. Frei and Anne Morriss suggest that trust has three drivers: empathy, logic, and authenticity. Times of economic instability present unique opportunities for fintechs to strengthen trust. You can do that by showing you care (empathy), offering solutions that meet evolving needs (logic), and following through on your promises (authenticity).
During recessions, consumers set stricter priorities and often have to reduce their spending. Offering financial products that ease financial strain, help with budgeting, and make saving easier can illustrate that you understand and care about their situation, have developed a solution that makes sense and that you’re ready to help. As you contemplate financial products, consider how they deliver on those three drivers of trust.
It’s essential not to be predatory. The idea is to help your customer community with more services and provide access to financial tools. Other examples of financial products that illustrate your understanding of changing consumer needs during an economic downturn might include:
o Access to cash at fee-free ATMs
o Credit score building
o No-fee overdraft protection
o Early access to pay checks
o Budgeting tools
o Spending notifications
It’s all about empowering consumers to take control of their finances and make better decisions. You do this by fully leveraging available real-time data, delivering that information in intuitive ways, and providing insights that align with the individual consumer’s reality. It all comes down to trust.
Agility
Customer retention is deeply rooted in having a deep understanding of your customer base and being in tune with their ever evolving needs. In times of economic uncertainty, consumer spending habits can change rapidly. As described above, quickly adapting your financial products to cater to changing behavior can improve customer experience and strengthen bonds with consumers. Agility is the ability to sense and quickly respond to these changes.
Bank of America Institute’s report, “Changing consumer spending habits during a recession,” looks at historical shifts in spending during recessions over the years. It found that consumers tend to dine out at less expensive places, hold off on purchasing durable goods, and slash vacations. Every family situation is different, but at a macro level, it’s about reducing ‘want to haves’ so they can afford ‘need to haves.’
The pace of these changes can be unpredictable. Sometimes it is gradual and others it is lightning quick. For instance, during the early stages of the pandemic, the shift to digital commerce happened virtually overnight. For fintechs, the ability to sense and quickly respond to change can be the difference between success and failure.
Flexibility
No doubt you’ve done plenty of work to identify customer segments and personas. The bad news is that the marketing strategies you’ve crafted may not work in a recession. It’s important to be flexible and not hold onto plans that quickly become obsolete as the economy shifts into low gear.
As John Quelch and Katherine Jocz wrote in Harvard Business Review, “The first step in responding must be to understand the new customer segments that emerge in a recession.” They suggest consumers fall into four groups:
o Slam-on-the-brakes
o Pained-but-patient
o Comfortably well-off
o Live-for-today
As you can probably tell from the names, each group has a different level of sensitivity to harsh economic realities. However, these are in-demand digital banking solutions that cater to consumers’ everyday needs and they will find enthusiastic consumers in all four groups.
Essential financial products include an easy-to-open digital bank account, direct deposit, fee-free ATM access, and bill pay, among others. These are the meat-and-potatoes of banking, but they are compelling products across customer segments – even among the unbanked and underbanked.
And remember, recessions are temporary. That same level of flexibility will be equally valuable when the economic engines fire up again.
As rates go up and economic activity slows down, fintechs don’t need to duck and take cover. Instead, they can still seize the opportunity to establish deeper customer connections. Listen to consumers, stay narrowly focused on what is essential, and be willing to part ways with financial products that no longer meet consumer needs. In the end, it comes down to strengthening trust so your interests are aligned with your consumers, having the agility to react quickly to changing behaviors, and staying flexible to take advantage of this moment.
The entrepreneurs who believe that big challenges present big opportunities have found themselves in the right place at the right time. With inflation running hot and the Federal Reserve raising rates, small business confidence has never been lower. Over 70% of small business owners taking part in the CNBC/SurveyMonkey Small Business Survey said the U.S. economy is either already in recession or will be before the end of the year. What is felt on Main Street is almost always felt in the homes that surround Main Street.
According to Pitchbook’s Q2 Fintech Report, VC investment in fintech companies fell nearly 18% in Q2 compared to Q1. This has ratcheted up the intensity in what was already a highly competitive environment, as companies vie for a diminishing pool of funding and an increasingly anxious base of consumers.
Embedded Finance
Embedded Finance is one of the ways in which brands are boosting sales and increasing Customer Lifetime Value. To dig deeper into embedded finance, join us in San Francisco, California on December 1, 2022. Some members of our community may even qualify for a complimentary pass (check out the website for the criteria).
