Impact of Inflation on Fintech Firms in 2022

The inflation rate is one of the key indicators for determining the health of the economy, the effectiveness of the regulation, and the compliance requirements. The development of business entities, the profitability of financial companies, and the quality of life for citizens are also affected by inflation. The rapid increase in the level of inflation in the world over the past couple of years shows high turbulence in financial markets and price instability. This negatively affects international trade, the business environment, the financial sector, and the standard of living.

Analysis of the growth rate of inflation in the world

Inflation refers to the decline in the purchasing power of money over time. As the prices of goods and services rise, the same amount of money cannot buy as much as it once did. This primarily leads to increased consumption costs, reduced investment volumes, and depreciation of savings for businesses and citizens.

In the financial sector, inflation indicates money depreciation, typically increasing the country’s central bank discount rate. Consequently, this negatively impacts the attractiveness of the business regulatory environment. The significant increase in the discount rate by the Federal Reserve System in the USA and the European Central Bank in Europe in July somewhat curbs inflation. This is due to the “expensive money” policy, but it adversely affects the growth of innovative financial services and the crypto industry.

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Consequences of Rising Inflation and Compliance Requirements for Fintech

The consequences of inflation for the fintech industry can be ambiguous. This is due to the technological specificity of such companies’ activities. On one hand, the use of high-tech platforms for money storage, payment services, and online banking enabled these companies to lead in profitability during the pandemic. On the other hand, inflation is a macroeconomic factor that impacts not only fintechs but also their clients. Moderate short-term inflation can stimulate the revision of financial budgets and trigger new growth. However, long-term high inflation poses a clear threat to businesses, depleting their internal resources and hindering value creation.

An increase in the central bank’s interest rate as a response to high inflation automatically results in increased interest rates on loans, increased payouts on deposits, and increased fees in payments.

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Impact of High Inflation and Compliance Requirements on the Fintech Industry

Given the current inflation situation worldwide, the high level of inflation has several implications and risks for the fintech industry, including:

Decrease in Profitability and Compliance Requirements: An increase in operating costs, risk coverage costs, and interest rates by Central banks may lead to a decline in profitability for fintech firms. This in turn emphasizes the need for stringent requirements.

Rising Equipment Costs and Compliance Requirements

Escalating prices for technological platform updates, reduced export of computer equipment, and higher energy prices contribute to increased equipment costs.

Impact on Customer Base and Compliance Requirements

Political tensions leading to sanctions can result in decreased customer bases in certain jurisdictions thus emphasizing the need for compliance with regulatory requirements in different geopolitical environments.

Investor Confidence and Compliance Requirements

Inflation risk and decreased returns may reduce investor confidence, necessitating compliance with regulatory standards to mitigate risks and reassure investors.

Mergers and Acquisitions to Address Compliance Requirements

The industry may witness increased mergers and acquisitions to consolidate resources therefore optimizing budgeting, and navigating regulatory requirements, including compliance obligations.

Elevated Business Risk Costs and Compliance Requirements

Operational peculiarities and the need for stringent security measures contribute to high costs of covering business risks, emphasizing the compliance requirements for risk management.

Financial Service Fees and Compliance Requirements

Global economic conditions, increased interest rates, and risk factors influence the imposition of high fees for financial services, necessitating compliance with evolving financial regulations.

Debt Service Costs and Compliance Requirements

Fintech companies may face increased debt service costs and the need for investment loss insurance, especially in virtual assets markets, emphasizing compliance requirements for risk mitigation.

Tightened Compliance Requirements

Stricter regulations, complex KYC procedures, and limitations on financial transactions necessitate enhanced compliance requirements for fintech firms to adapt to evolving regulatory landscapes and geopolitical dynamics.

By addressing these challenges and compliance requirements, fintech firms can navigate the impact of high inflation and sustain their operations within a dynamic global financial environment.

Conclusion

In a nutshell, the survival of fintech firms in these times of turbulence largely depends on their flexibility, speed of response to changes in the business environment, knowledge of regulations in the field of regulation and appropriate compliance. No matter how macroeconomic conditions and geopolitical frameworks change, modern world economies are highly dependent on financial technologies, which will motivate the industry for further growth.

References

1. Pew Research Center (2022). In the U.S. and around the world, inflation is high and getting higher. by Drew Desilver.  15 June 2022.  – URL: https://www.pewresearch.org/fact-tank/2022/06/15/in-the-u-s-and-around-the-world-inflation-is-high-and-getting-higher/
2. How Inflation Will Affect Fintech Firms in 2022. URL: https://www.fintechnews.org/how-inflation-will-affect-fintech-firms-in-2022/
3. Oliver Wyman (2022). The Impact Of Inflation On European Banking. By Matt Austen, Elie Farah, and Emiliano Carchen. URL: https://www.oliverwyman.com/our-expertise/insights/2022/jun/impact-of-inflation-european-banking.html
4. How Does Inflation Affect Interest Rates? By Sharren Stringler Last Updated September 01, 2021. – URL: https://www.askmoney.com/loans-mortgages/how-inflation-affects-interest-rates

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