Fintech is far from “dead”

Central banks hitting the monetary brakes with a series of ongoing rate hikes is certainly a headwind, but that doesn’t mean venture capital will dry up completely, nor does it mean fintech startups are doomed.

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Recent reports of the death of fintech have been greatly exaggerated.

Not without some schadenfreude, a number of commentators have taken aim at the fintech startup world in recent months, which has been peppered with some notable meltdowns as well as layoffs of thousands of people.

But while there is a definite “vibe shift”, fintech is alive and well and doing great things.

It’s true to say, fintech has always been a rather nebulous term at best. A portmanteau of ‘financial technology’, it suggests that technology in finance is a new thing while it has always been integral.

That said, massive amounts of near-free central bank liquidity have created an exceptional environment for venture capital funding over the past decade that has helped fintechs fund rapid customer acquisition and the development of reams of computer code that have spawned hundreds of new banks, brokerages, lenders. and infrastructure providers.

This reached new heights in 2021, especially for fintech startups that collectively raised $139 billion globally to build various ventures about the future of money.

Of course, as you know, all of this has come crashing down in 2022, as the unholy trinity of the pandemic, the Russian invasion of Ukraine, and the accompanying high inflation have prompted central banks to slam on the economic brakes with a series of ongoing interest rate hikes.

This makes capital more expensive, as well as making less risky investments more attractive compared to ordinary investors in venture capital such as pension funds and other institutional investors. At least that’s the popular argument.

Does that mean fintech is dead? No. Let me explain why.

It is true that Fintech deal activity continues to weaken as higher interest rates, lower valuations and economic uncertainty take their toll after a period of record activity.

The three months to the end of June 2022 represent a shift for fintech funding. Total deal activity across private equity financings, IPOs and M&A in Q2 2022 was down 67 percent from a peak in Q3 2021. It also fell 29 percent year-over-year from Q2 2021 and fell 24 percent from Q1 2022, according to FT Partners.

But despite a carnage in the publicly traded tech space, private fintech companies still raised $27.6 billion, a huge figure.

Granted, that represents the lowest quarterly volume since Q4 2020 ($11.8 billion) and a drop of more than 30 percent from Q2 2021 ($39.6 billion), but on an absolute level, this is still big money that can fund big ideas.

In the UK, the fintech sector has seen an increase of 24 per cent year-on-year despite a global slowdown in investment in the first half of 2022.

UK-based fintechs received $9.1 billion in investment across 294 deals, compared to $7.3 billion across 375 deals in the first half of 2021, according to Innovate Finance.

Compare this with capital raising by public companies in the first six months of 2022 in the UK, which is less than 50 per cent of that in the first half of 2021, and around a third of the amount raised in the first half of 2020, according to data which Goodbody has written.

In the first half of 2022, just £5.7bn of new capital was raised by UK listed companies, the slowest start to a year in almost a decade. When excluding listed investment vehicles, this figure falls to £2.5bn.

Private equity financing can actually be beneficial, according to FT Partners, because of an IPO market that is essentially closed. However, it’s also worth noting that they say there is a lag in the quarterly data with many deals announced during Q2 likely being agreed a few months earlier.

Given the lag effect, a marked decline in activity in the months and year ahead seems likely. And 2023 is probably going to be very tough.

Nevertheless, there are many interesting companies that are still raising enough money to see them through this period. It is likely that they will use the time to focus on innovation when it comes to digital products. Will larger banks do the same?

The central idea of ​​fintech is also not the same as ever-increasing volumes of venture capital. It is that the combination of software and bold ambition ideas can create better financial services. While funding is an important pillar. Good ideas will still be funded.