Leveraging everything from basic apps to the blockchain, the changing dynamics of fintech are creating new investment opportunities everyday, growing its appetite with every new megadeal. Today’s graphic from Raconteur highlights the global growth of the fintech industry, the services with the most staying power, and major M&A developments of the past year as traditional institutions scramble to deal with this digital disruption.
How Fintech Levels the Playing Field
Over the past five years, digitally-enabled financial technology services have delivered convenient and cheaper access to financial services to millions of consumers. What draws consumers towards using fintech?
Attractive rates and fees (27%) Easy access and account setup (20%) Variety of innovative products and services (18%) Better service quality and product features (12%)
This new implementation of technology is democratizing financial services for the masses, a strong contrast to accessing them through traditional brick-and-mortar institutions.
How Fintech Fares Across Borders
On average, 64% of the world’s digitally active population has used at least one fintech service. But China and India surpass this benchmark by a mile—in a survey of 27,000 consumers across 27 markets, both countries demonstrated a 87% fintech adoption rate. Russia and South Africa are in close second, with 82% adoption respectively. On the other hand, France and Japan are tied at the low end of the spectrum with only 35% fintech adoption. The trajectory of mobile payments and digital wallets in China can help put high Asian adoption rates in perspective. Thanks to services like Alipay and WeChat, 890 million unique mobile payment users are essentially transforming China from a cash economy to a digital one.
Which Services Have Caught Consumer Attention?
Just like “Googling” is synonymous with looking up information online, the term “Venmo-ing” has become an American verb for paying someone back via a digital wallet.
That’s why it’s no surprise that money transfer and payments are by far the most rapidly growing fintech services, shooting up from 18% to 75% global adoption in just four years. Here’s how global average adoption rates differ by fintech service, across time:
Source: EY Global Fintech Adoption Index 2019
Insurtech has steadily gained traction in the market. Digital insurance solutions provide personalized and on-demand coverage plans for clients, using bots and machine learning to assess risk levels. As a result, this sub-segment has been attracting large funding rounds due to the time—and money—it helps free up for firms.
According to CapGemini, incumbents in the financial industry see wallets and mobile payments from fintech providers as the most significant offerings impacting their companies. That may be why they’re resorting to big moves to protect their business.
Deals and More Deals
Major financial institutions made some serious plays in 2019, in the way of mergers and acquisitions of fintech companies:
FIS bought the payments processing company Worldpay for $35 billion, valuing the company at $43 billion when debt is included. (Reuters) The London Stock Exchange Group plans to acquire financial markets data provider Refinitiv for $27 billion, in the hopes of rivaling Bloomberg. (Reuters) Global Payments bought the payments processing company Total System Services for $21.5 billion, planning to provide services to over 1,300 financial institutions. (Bloomberg) Fiserv acquired payments processing company First Data for $22 billion—the two companies combined are a backbone of Wall Street’s financial technology. (WSJ) Visa purchased the payments authentication company Plaid for $5.3 billion in January 2020, in hopes of strengthening its relations with financial institutions. (CNBC)
As billions of dollars exchange hands, it’s been noted that many of these plays were made by established incumbents to curb the threat posed by fintech startups. At the same time, however, it’s also clear that traditional institutions want to tap into what fintech startups are doing right. on But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run. So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list. Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet. The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued. Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits. By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years. In 2021, U.S. venture capital-backed companies raised a record $330 billion—double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy. Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.” Source: Pitchbook Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low. During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses. In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
