FinTech’s threat to big banks declined in 2022 with rising rates: Moody’s report

By Puja Sharma

A decline in venture capital funding in 2022 particularly hurt FinTech firms that rely on outside capital to fund their operations and acquire clients, According to Moody’s report.

The report cited figures from CB Insights that showed global FinTech funding fell 46% from 2021 to 2022. The competitive threat of financial technology companies to big banks diminished over the past year as rising interest rates constricted funding, a new report from Moody’s Investor Service found.

A decline in venture capital funding in 2022 particularly hurt FinTech firms that rely on outside capital to fund their operations and acquire clients, Moody’s analysts wrote in the report on Wednesday. Traditional banks that have long benefited from established brands and customer relationships have accessed stable deposit funding over the past year, which has given them an edge over many fintech companies, Moody’s said.

Sharp rate hikes by central bankers and souring perceptions of high-growth loss-making firms have shifted the landscape for investment and caused venture capital firms to rein in their investments.

Volatility on global markets has also largely scuppered planned IPOs and led to high-profile valuation ‘haircuts’ for fintech firms.

London firm Sumup was reportedly targeting a $20 billion valuation at the start of the year but was forced to row back the plans and raised $590 million at an $8 billion valuation. Checkout.com also reportedly slashed its internal valuation at the end of the year to $11 billion.

The slump underscores the scale of the challenge facing the sector as policymakers and regulators in the UK look to boost its standing as a hub for global FinTech firms.

Ministers have rolled out a swathe of reforms in the past 12 months in a bid to boost the UK’s appeal as a place for FinTech firms to grow and go public. Digital Economy Minister Paul Scully said the government was now looking to throw its weight behind the sector in the year ahead.

“In 2023 we are focusing on maintaining that lead by supporting start-ups, boosting digital skills, and making this country an even more attractive destination to found, grow, and invest in tech businesses,” Scully said in the report.

Rising interest rates, surging inflation, and the shockwaves caused by the war in Ukraine brought an end to a decade-long global venture capital frenzy last year.

Banks have long recognized that technology could disrupt business models and allow technology conglomerates to enter banking, Moodys said. “They have been aggressively defending against such risks, either through increasing their spending in technology or through partnerships.”

FinTech companies often face more regulatory obstacles than banks and may have encountered new requirements in certain jurisdictions in recent years, according to Moody’s. In Australia, for example, regulators in 2021 updated the country’s licensing framework for new depository institutions and are considering how to bolster their oversight of consumer credit.

But although the current macroeconomic environment may pose challenges to fintech companies, the sector still has the potential to increase financial inclusion and lower costs to consumers, the report found.

“As has happened in previous market cycles, a large number of nascent fintech with weaker business models will likely disappear, and a handful will survive and prove truly disruptive over time,” said Moody’s.