Top Fintech Trends 2022 | Silicon Valley Bank

Regulation continues to supersede innovation

Fintech companies currently face uncertainty as federal regulators grapple with technology’s role in financial services and examine potential risks to consumers.

Source: State of Fintech, 2022

Dozens of federal agencies already have broad mandates to protect consumers from data breaches, unfair lending and fraud, while ensuring digital platforms comply with anti-money laundering safeguards and international sanctions. Recently, we have seen moves to strengthen fintech oversight, with the creation of the US Securities and Exchange Commission (SEC) FinHub, the Office of Competition and Innovation at the Consumer Financial Protection Bureau (CFPB) and the new Office of Financial Technology at the Comptroller of the Currency (OCC) .

The CFPB has signaled that greater scrutiny is coming for providers of short-term consumer loans known as buy-now, pay-later (BNPL), which are not required to provide data to credit bureaus. The popularity of BNPL products skyrocketed during the pandemic, with originations jumping from 17 million loans in 2019 to 180 million in 2021 — a 10.6-fold increase, according to the CFPB.

Even as regulators move into the fintech sector, they face the ongoing challenge of trying to keep up as technological innovation sprints ahead. The CFPB, for one, is crafting new rules issued under the 2010 Dodd-Frank Act — a series of financial regulations enacted to prevent future financial crises — to establish standards for sharing consumer financial data to address privacy concerns from BNPL and other new consumer payment options. Meanwhile, the collapse of crypto exchange FTX is likely to accelerate regulatory initiatives in the digital currency space. Contagion from FTX leads to other crypto bankruptcies, including BlockFi, which in February had to pay $100 million in SEC penalties for violating securities laws. The FTX fallout highlights the complexity of regulating such an interconnected space.

Similarly, investors are closely watching the SEC’s lawsuit against payments platform Ripple Labs, which the regulator claims sold digital assets as unregistered securities. Based on recent supervisory developments, it is clear that the issue of consumer data will remain a recurring theme for regulators. In addition, the OCC has indicated that partner banks, which typically provide the underlying banking products for fintech platforms, may face higher levels of regulatory scrutiny in the near future. Until we have a better idea of ​​the direction of fintech regulation, start-ups will find themselves navigating a murky landscape.

Investors cool on consumer fintech apps

Fintech offerings aimed at consumers are also struggling with the slowdown in public markets and higher interest rates, which are taking a toll on investor interest in stock trading apps and consumer loan products. The number of agreements from year to year was halved for consumer loans and personal wealth management, according to SVB’s fintech report. Investment volume in consumer payment companies fell 73% from 2021.

Despite the headwinds, consumer fintech companies remain on solid footing thanks to steady growth during the pandemic and opportunities for product expansion. Interest-bearing accounts and a potential pivot to commercial products, including BNPL corporate products, offer potential opportunities during the downturn.

In addition, consumer fintech is a potential M&A target for banks, which is likely to gain momentum given the growing number of US fintech unicorns (a trend I discuss in the next section).

On the commercial side, the outlook is even more promising. Alternative lending was the only fintech sub-sector to show quarter-over-quarter growth, based on our research. Also, the insuretech and commercial payments sectors were more robust compared to consumer counterparts.

Late-stage fintechs try to outrun downturns

With the public markets down and the IPO window closed, a backlog of late-stage fintechs is building. This puts pressure on entrepreneurs to maintain growth while looking at opportunities to return money to investors.

Dry powder is plentiful, but with valuations down (earnings multiples for public fintech companies have fallen 55% since the market peaked on Jan. 3), founders are avoiding deals. Many companies are flush with cash from big investments in 2021, but with a downturn looming, these companies are saving cash. Based on our proprietary data, more fintech companies reduced their net burn in Q3 2022 than at any time since the outbreak of the COVID-19 pandemic. For example, 43% of fintechs cut salaries in Q3 2022, compared to 25% cuts in Q1 2022. Overall, we see stagnant growth rates, with 66% of fintechs growing more slowly than they were in Q2 2022.

For the growing stable of fintech unicorns – up 38% from Q4 2021 – they are facing the longest IPO drought since 2018-19. The median fintech unicorn is 6.1 years since the first round, up from 5.5 years last year.

However, with valuations for Series C+ fintechs down 24% from their recent peak and the corresponding retreat from venture capital investors, we are likely to see an increase in M&A activity.

Explore more sector trends in SVB’s State of Fintech report.