Adverse market conditions have hit the fintech industry hard. Are banks and fintechs now moving closer together? Everyone could benefit from more cooperation.
Few industries have been in the spotlight as much as the fintech sector in recent years. Starting in the pandemic year of 2020, the number of IPOs in the fintech sector has skyrocketed in the wake of the digitalization push. In the US alone, more than 30 fintechs have gone public since then. But the climate in the once «hot» fintech industry has cooled considerably this year, and several high-flyers have been brought back down to earth.
Faced with high market volatility and a looming recession, investors have pulled out of fintech startups. Plans for fintechs to go public are often put on hold, while previous overheated stock market valuations have melted away considerably. Quite a few fintechs are now trying to cut costs, which in some cases includes jobs. According to the Layoffs.fyi web portal, more than 430 startups worldwide cut over 61,000 jobs since the beginning of the year.
Down Across the Board
A look at the stock market shows how drastically the market had been impacted. In the US, industry giants such as Paypal and Block (formerly Square) have at various points suffered combined losses of around $300 billion in market capitalization this year. Even privately held companies are not immune from the market malaise. The valuation of Swedish buy-now-pay-later giant Klarna fell by about 85 percent to less than $7 billion. A dramatic fall in anyone's book.
Data from research firm CB Insights show fintech funding fell 33 percent on a quarterly basis and is 46 percent lower year-over-year to $20.4 billion in the second quarter. Meanwhile, the number of deals fell 17 percent to 1,225 from the previous quarter, bringing both financings and deals to their lowest levels since the last quarter of 2020. Fintech Mergers and acquisitions fell 30 percent in the second quarter from the previous quarter, marking the sharpest quarterly decline in mergers and acquisitions in recent years.
A one-off tailwind?
In sectors such as Buy Now/Pay Later, investors are now questioning the lack of profitability of many companies and worrying about potential defaults by borrowers in the event of a recession. In some cases, the valuation discounts for fintechs are so steep that valuation levels are now often lower than before the Corona pandemic - as if the digital tailwind was only temporary.
Valuation corrections due to rising interest rates and fears that discretionary consumer spending could decline in the wake of a recession are part of a shakeout and have a longer-term market-clearing effect. To write off the trend toward digitization completely would be misleading, and digitization will continue to create new growth areas in the future.
New Product Pipeline
Despite the crisis, the fintech industry is not lacking innovative strength. Leading providers such as Klarna and Stripe, which enables small businesses to accept digital payments, continue to be active in product development and are constantly adding new services. Affirm has expanded its reach through a partnership with Amazon, and Block is expanding its point-of-sale credit offering to match its main competitor, Paypal.
UK payments company Wise, meanwhile, is teaming up with Google Pay to expand Google's capabilities to support international mobile money transfers. London-based Revolut is looking to expand its global reach with the recent launch of Revolut Reader, the company's first payment terminal hardware, allowing Revolut to compete with Block and Paypal, among others.
Cooperation Instead of Competition
Numerous growth opportunities for consumer- and bank-facing fintechs are still out there. In the future, closer relationships and cooperation between banks and fintechs are an opportunity to expand the range of services to the benefit of both sectors. Many fintechs are significantly more innovative than traditional financial institutions and their solutions could help to greatly improve the customer experience at banks and increase customer satisfaction.
Fintechs have the opportunity to save time and costs through Banking as a Service (BaaS) by conducting banking transactions under a bank's license or offering financial services through collaborative partnerships. Such opportunities need to be increasingly exploited.
If fintechs and banks can cooperate more closely in the future and make their services more mutually accessible, not only customers will benefit, but also the companies involved. Looking ahead, more cooperation instead of competition appears to be one of the most promising growth strategies.
