- Regulation still lags innovation
- Investors cool on consumer fintech apps
- Late-stage fintechs try to outrun downturn
Regulation still lags innovation
Source: State of Fintech, 2022
Dozens of federal agencies already have broad mandates to protect consumers from data breaches, unfair lending and fraud, while also ensuring digital platforms comply with money laundering safeguards and international sanctions. Recently we’ve 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), who aren’t required to give data to credit agencies. Popularity for BNPL products skyrocketed during the pandemic, with originations jumping from 17 million loans in 2019 to 180 million in 2021 — a 10.6x increase, according to the CFPB.
Although regulators are homing in on the fintech sector, they’re facing the ongoing challenge of trying to keep up as technological innovation sprints ahead. The CFPB, for one, is crafting new rules granted under the 2010 Dodd-Frank Act — a series of financial regulations passed to help prevent future financial crises — to establish standards for sharing consumer financial data to address privacy concerns posed by BNPL and other new consumer payments capabilities. Meanwhile, the collapse of crypto exchange FTX is likely to accelerate regulatory initiatives in the digital currency space. Contagion from FTX is leading 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.
Likewise, investors are closely monitoring SEC’s lawsuit against payments platform Ripple Labs, which the regulator alleges sold digital assets as unregistered securities. Based on recent oversight developments, it’s clear that the issue of consumer disclosures will remain a recurring theme for regulators. Additionally, the OCC has indicated that partner banks, which commonly provide the underlying banking products for fintech platforms, may face greater 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 geared toward consumers also are contending with the public markets slump and higher interest rates, which are taking a toll on investor interest in stock trading apps and consumer lending products. Year-over-year deal counts were cut in half for consumer lending and personal wealth management companies, according to SVB’s fintech report. Investment volume in consumer payments companies fell 73% from 2021.
Despite the headwinds, consumer fintech companies are still on solid footing thanks to steady growth during the pandemic and product expansion opportunities. Interest-yielding accounts and a potential pivot to commercial products, including BNPL products for businesses, offer potential opportunities during the downturn.
In addition, consumer fintechs are potential M&A targets 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 subsector to show quarter-over-quarter growth, based on our research. What’s more, insuretech and commercial payment sectors were more resilient compared to their consumer counterparts.
Late-stage fintechs try to outrun downturn
With the public markets down and the IPO window closed, a backlog of late-stage fintechs are building. This is putting pressure on founders to maintain growth, while eyeing opportunities to return money to investors.
Dry powder is abundant, but with valuations down (revenue multiples for public fintech companies have declined 55% since the market peaked on Jan. 3), founders are avoiding deals. Many companies are flush with cash from large investments in 2021, but with a downturn looming, these companies are conserving cash. Based on our proprietary data, more fintech companies decreased net burn in Q3 2022 than at any point since the onset of the COVID-19 pandemic. For example, 43% of fintechs cut payroll in Q3 2022, compared to 25% cutting in Q1 2022. Overall we’re seeing stalling growth rates, which 66% of fintechs growing slower than they were in Q2 2022.
For the increasing stable of fintech unicorns — up 38% from Q4 2021 — they’re facing the longest IPO drought since 2018-19. The median fintech unicorn is 6.1 years since 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 pullback from venture capital investors, we’re likely to see an increase in M&A activity.
Explore more sector trends in SVB’s State of Fintech Report.