Does The Fintech Funding Dry Spell Signal A Bright, Shiny New Day For Legacy Banks?

In the beginning of 2022, the signs that the fintech bubble breaking was on the horizon were few and far between.

"Predictions have been heard for years that the fintech funding bubble will burst. But so far it shows no signs of slowing down, at least through the beginning of 2022," read one Financial Brand article in March.

Boy, has that changed in eight months.

Funding used to be at all time high for fintechs and digital banks, who were navigating the traditional banking space like they were pros. They certainly had the liquidity to back them.

Neobanks did enjoy a good long ride based on the special features and incentives they have offered to consumers. But as investor financing becomes harder to raise, that advantage has become harder to sustain.

"Neobanks have attracted popularity off the back of compelling, flashy and often very lucrative [for consumers] feature offerings that set them apart," says Dan Van Dyke, Vice President, Content and Head of Financial Services at Insider Intelligence.

"Examples include overdraft cushions and high-yield savings accounts such as those offered by players like Aspiration or Varo."

What Digital Banks and Fintech Unicorns Were Doing "Right" Through 2021

By itself, the word 'unicorn' doesn't seem to hold much threat or importance for bankers. Unicorns, after all, are the stuff of mythology and legend?— nothing to do with the cold, hard numbers of finance.

To investors and venture capital firms, however, a 'unicorn' isn't a beast, real or imagined, but a startup company that has reached the level of $1 billion in funding.

When the woman who coined the word 'unicorn' in that context — Aileen Lee — first wrote her article on the topic in 2013, the fintech movement was just picking up steam. The designation "fintech unicorn" came into being. No cards, no membership kit, but all the same a gift to founders' self-esteem and headline writers looking to confer status on booming companies.

Nowadays the lists of unicorns in general and fintech unicorns specifically has grown beyond that 'rare' factor Lee mentioned. The list maintained by CB Insights runs a bit over 1,000 firms, globally, split into categories.

Although they've been around for a while, funding wasn't always a point of easy access for fintechs and digital providers. As noted in the chart above, it didn't really take off until 2021.

In the early days of Covid, especially, was when fintechs struggled to get off the ground.

"Investors will be cautious for a few months and look for safer options," Elias Ghanem, Global Head of Market Intelligence for Capgemini's Financial Services told The Financial Brand in mid-June 2020. He added at the time that sentiments would become positive again sooner or later (which they did).

The flux of money flowing into fintechs could partially be attributed to governmental forces. For example, the U.K. government had been very aggressive for the past several years at promoting the country as a fintech hub and creating an environment that attracts funding and entices startups.

The Financial Conduct Authority, a U.K. regulatory body, created a sandbox that allows businesses to test innovative solutions in the market with real consumers. Deloitte notes that working with the FCA in this sandbox environment gives fintechs a greater degree of legitimacy with investors as well as customers.

The Beginning Of The End For Nonbank Start-ups

But, what goes up must come down — at least to a degree.

The start of 2022 once appeared to mean the dawn of another day for fintech unicorns and digital bank startups.

However, there were signs even toward the end of 2021, and into the beginning of 2022, that the bubble's formerly impenetrable exterior was dissipating.

Signs of escalating war related to Russia's invasion of Ukraine and increasing inflation in the U.S. were lessening investor's appetite to shell out big bucks. For instanced Chime delayed its much-anticipated IPO, with fintech stocks down 40% since Oct 2021, as of late February 2022.

"As fintechs stocks have slumped, some investors — especially those that place bets on both private and public companies — have started to demand lower valuations from startups," Forbes notes.

Now, funding has virutally fizzled.

Where the Money Isn't:

VC funding for fintechs saw the biggest quarterly drop in nearly a decade between Q1 and Q2 2022.

One Digital Bank Defying the Impossible (At Least For Today)

Although many neobanks struggle to keep their heads above water and the company afloat, one is having little to no issues accessing funding: Marygold & Co.

Its parent company — The Marygold Companies — is the key. The holding company oversees a variety of other businesses with an eclectic set of interests including (but not exclusively) a major baked goods and food company in New Zealand, a security specialist in Canada, a vegan health and beauty products company in California, and a New Zealand printing company.

The?investment focus is coming full circle, giving the Marygold & Co. fintech its start without having to depend on proving itself to venture capitalists and other deep-pocketed investors for every nickel.

The funding has supplies Marygold & Co. with the lifeblood it needs to offer banking services to a very unique subset of customers: HENRYs, which stands for High-Earner-Not-Rich-Yet.

"We're looking to introduce a marriage of high tech and high touch to our clients, which we think is missing out there," says President and Chief Operating Officer Chad Butler. "There are a lot of high-tech offerings that try to be all-in-one solutions that become difficult to navigate and hard to relate to your own financial journey."

Click here to read the full Marygold & Co. story.

Why Legacy Financial Institutions Have Less to Fear in 2023 From Digital Banks

Back in the peak of fintech innovation and growth, banks and credit unions felt the need to react likewise — and for good reason.

U.S. banks' overall technology spending will continue to grow from $79.49 billion in 2021 to an estimated $113.71 billion in 2025, according to Insider Intelligence forecasts. This not only includes large banks, where tech spending and operations are "joined at the hip" with customer-focused digital teams, but smaller banks as well.

Community banks nationwide are spending more on technology, according to a November 2021 survey from Bank Director, which notes that this is at least partially driven by competitive pressures from fintechs and other nonbanks. In some cases these competitive threats, from tech giants, retailers and digital banks were not a factor three to five years ago.

The flock of neobanks in particular was a hearty reason to spur change. However, like their brethren in the buy now, pay later space, the past several years has seen a wave of neobanks enter the market accompanied by a seemingly never-ending hype cycle. Now, it seems as if many may not survive into the future.

Challenging Times:

Many digital-only neobanks — cash-strapped — are having to scale back their ambitions.

Even the most well-known and established neobanks are dealing with headwinds. Varo Bank laid off around 10% of its workforce in July.

• Starling Bank pulled its application for a banking license in Ireland.
• Revolut last month saw a glut of resignations in its risk and compliance department. MoneyLion is facing investor skepticism as it burns through cash, the Financial Times reports.
• BNPL platforms Affirm, Klarna and Robinhood have all seen their valuations crater in recent months.

The drain in funding and associated freefalling valuations of many neobanks could present an opportunity for banks.

For example, Affirm and Klarna are currently worth around $8 billion and $7 billion respectively, compared with peaks of almost $50 billion.

"Their fast-growing consumer-lending businesses could be appealing for Goldman [Sachs], which is already dabbling in the sector through a credit-card partnership with Apple," writes an analysis from Reuters. "Meanwhile, $8 billion trading app Robinhood is worth little more than its net cash. Buying it could help a lender target the so-called 'mass affluent' U.S. wealth market, like UBS."