After a golden decade, fintech is facing its first true test

Europes annual The Money 20/20 conference is where fintech rock stars come to cut deals and cure investors. Shindig this month, the first real extravaganza since 2020, received the extra sum of a long-awaited reunion, enhanced by djs and brass band. “Money 20/20 is back in full technicolor,” trumpeted Tracey Davies, the master of ceremonies.

However, the tone was out of sync with the mood outside the room. Rising interest rates and the threat of an economic downturn hang over the industry. Many listed fintechs have seen their market value crash by more than 75% since July 2021; Private companies are forced into “down-rounds” that value them at less than their previous value. In recent weeks, a regrettable group of multi-billion dollar fintechs from Klarna has a “buy now, pay later” (bnpl) company, to Wealthsimple, a trading app, has announced layoffs. In total, fintechs has fired around 5,500 employees since May 1, according to Layoffs.fyi, a website, compared to none last year.

The problems are in stark contrast to the exuberant 2021, which was driven by the rise in digital finance and investors’ pursuit of returns. Financial start-ups raised $ 132 billion last year, more than double by 2020; As many as 150 of them reached a value of 1 billion dollars or more. Supporters are now on guard – especially “non-traditional” venture capitalists, such as government wealth and pension funds, who have accumulated late in the cycle. Some vc Investors withdraw from agreements after they are signed.

For many insiders, the downturn serves to remove foam from the market. “There was a lot of greed,” notes Vidya Peters of Marqeta, a debit card company. The idea is that the current turmoil will be limited to a correction in valuations, and that the secular trends that have driven fintech so far remain in place. “Very little has changed,” said Rana Yared of Balderton Capital, a vc solid. The recent declines, she points out, have pushed many valuations back to the levels in early 2020.

Nevertheless, the financing crisis can cause real damage. Olivier Guillaumond av ing, a Dutch bank that also invests in fintech, says it advises companies in the portfolio to raise debt instead of equity, to avoid diluting valuations. But that means more borrowing just as interest rates rise. vcs also asks startups to hoard more money to protect themselves from shock. The head of a “neobank” says that he plans to cut the marketing budget by 75%. However, it may compromise the growth on which valuations have tended to be based.

Even worse, business models are exposed to an acidic economic environment. Many fintechs rely on securitization of loan and credit card portfolios, or wholesale financing from banks, to run their credit business and make them vulnerable to rising interest rates. Falling household incomes and reduced consumption expenditures can mean higher default rates and lower fees for payment companies.

The tide turns in other ways. Some companies had tried to exploit loopholes that helped them avoid some of the regulatory burdens banks face; many of these are now closed. Others have seen their products commodified as rivals have swarmed in. bnpl has been affected by both problems. This month, Apple said it would launch one bnpl service in America.

Large fintechs with plenty of cash respond to the crisis by diversifying faster. Wise, which offers low-cost cross-border payments, has launched a stock trading platform and business accounting tool. Stripe, a payment giant that raised $ 600 million last year, has branched out into corporate lending and card issuance. John Collison, the president, says the company is considering expanding the services it offers.

Banks and credit card giants, meanwhile, are on the lookout for bargains while start-up values ​​fall. The very first session of Money 20/20 saw the head of Visa Europe grow lyrical about becoming a “network of networks”. Mastercard had sponsored one of the stages at the conference. Those sitting, in other words, crash the party. ■

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