Cryptovolatility marks disruptive substances from dead weight

If there’s one constant for FinTechs in general, and crypto and buy-now-pay-later (BNPL) firms in particular, it’s this: volatility.

For the digital-first and digital-only firms that want to change how banking is done and commerce is conducted, the regulatory gaze is tightening. Consumer tastes are changing. Inflation is roaring, which means it is more expensive than ever to operate. At the same time, capital markets are drying up, and financing is becoming more difficult to obtain.

For many of these firms—perhaps all of them—the way they make money today won’t necessarily be the way they make money in the years (even months) ahead, according to Jim McCarthy, president of i2c.

Cryptocurrency remains a key example of verticals struggling with pressures that seem to change daily. As McCarthy told Karen Webster, it would be a mistake to paint the crypto landscape as one characterized by a homogenous set of services. We are seeing, in the public and private markets, a flight to quality that separates the established names from the Celsius wallets of the world.

“It’s going to be tough,” he said for now, noting that “we’ve seen the Coinbase numbers.” Monthly transaction users fell quarter over quarter, as did the value of crypto holdings on that marquee platform’s balance sheet. But the company’s cash position remains strong (as management noted).

McCarthy told Webster that it’s the pick-and-shovel plays that may prove to be the most viable firms in this volatile climate. The infrastructure players are the ones who can work with regulators to standardize rails and work with banks to lay the foundation for crypto even though the digital assets have yet to find anything close to a ubiquitous use case…yet.

The innovators will thrive, and a handful of firms built around speculative concepts or crazy trading (hoping that values ​​will simply go up) will go the way of the dodo.

“Right now it’s a case of buyer beware,” he said of crypto, which as a form of payment is counterintuitive because of its inherent lack of stability, “and you have to go in knowing there’s no backstop — and you should don’t expect a backstop.”

There remains a critical lesson (especially for real-time payments) to learn among the fragmented, whipsaw crypto industry, McCarthy said.

And that lesson is that interoperability is key. We are not there yet, but cryptos must act as trusted IOUs between parties and must be able to cross borders without friction to settle with speed and transparency. Big tech companies like Facebook missed an opportunity here, he said.

FinTechs like banks

Volatility is also changing the nature of traditional financial services; FinTechs are making inroads into territory traditionally owned by the banks. Along the way, FinTechs are becoming even more bank-like. For example, they offer transactional debit cards and collect interchange revenue, but they need more than that to fund additional services for account holders (who are again fee-resistant).

It’s a tough sled given the fact that VCs are increasingly reluctant to fund these upstarts that want some diversification. Debit exchange rules may also be changing, which may not limit income streams.

For FinTechs that may have offered free accounts to get customers on board, but have then had to monetize those accounts, “they have to serve these consumers or lose them—the transaction model is only as good as the people doing the shopping. Even modest fees are continued fees.”

There’s a fine line to walk here as well, as cross-selling services and products can get these firms (including traditional banks) into trouble. The traditional banks have a built-in advantage over FinTechs, in that they have built-in compliance, and can compete on price in ways their less well-capitalized FinTech brethren cannot. Banks are particularly well positioned to withstand the change in the capital cycle and are less dependent on transaction income than FinTechs.

However, FinTechs can lean into some trends like the continued explosion in BNPL, but not without risks. The BNPL space is also volatile, characterized, as McCarthy said, by too many players and dwindling capital to finance them.

Seismic shifts loom for BNPL, he said, as the CFPB investigates the industry, but the specter of unintended consequences looms, as it’s not clear who the agency seeks to protect. “There is a lack of understanding of how the BNPL model works,” he said of the regulators. In fact, PYMNTS own research shows that BNPL users are prime and near prime users who tend to be quite smart with their money.

As these pressures persist, he predicted that we will continue to see roll-ups and acquisitions in the BNPL arena, such as Block’s purchase of Afterpay and banks continuing to enter the game. It is incumbent on the BNPL players today to ensure that they have the right data and data science teams in place to manage credit risk effectively. Looking ahead, he said, inflation remains firmly entrenched and will only become more painful in the months ahead as rate hikes continue to make debt more expensive.

But as savvy players build their brands and grow their footprints across the globe, he said, “you always want players who can weather the storm.”