Central banks hitting the monetary brakes with a series of (ongoing) interest rate rises is certainly a headwind but that doesn’t mean venture capital will totally dry up nor does it mean fintech startups are doomed.
Recent reports of the death of fintech are greatly exaggerated.
Not without a little bit of schadenfreude have a number of commentators taken aim at the fintech startup world in recent months, which has been peppered with some notable down rounds as well as the laying-off of thousands of people.
But, while there is a definitive 'vibe shift', fintech is alive and well and doing great things.
It is true to say, fintech has always been a pretty nebulous term at best. A portmanteau of 'financial technology, it suggests that technology in finance is a new thing whereas it has always been integral.
That being said, vast amounts of nearly free central bank liquidity have created an exceptional environment for venture capital funding in the past decade. This helps fintechs fund rapid customer acquisition and the development of reams of computer code that have created hundreds of new banks, brokerages, lenders and infrastructure providers.
This reached new heights in 2021, particularly for fintech startups who collectively raised $139bn, globally to build varying enterpretions of the future of money.
Of course, as you know, that has all come crashing down in 2022 as the unholy trinity of the pandemic, the Russian invasion of Ukraine and the associated high inflation has prompted central banks to hit the financial brakes with a series of ongoing interest rate rises.
This makes capital more expensive as well as making less risky investments more attractive on a relative basis to the normal investors in venture capital such as pension funds and other institutional investors. That’s the popular argument, at least.
Does that mean fintech is dead? No. Let me explain why.
It is true that fintech deal activity continues to weaken as higher interest rates, lower valuations, and economic uncertainty take their toll following a period of record activity.
The three months to the end of June 2022 represent a shift for fintech funding. Total deal activity across private company financings, IPOs, and M&A transactions in Q2 2022 was down 67 per cent from a peak in Q3 2021. It also fell 29 per cent year-over-year from Q2 2021 and declined 24 per cent from Q1 2022, according to FT Partners.
However, despite a bloodbath in the listed tech space private fintech companies still raised $27.6bn. This is a huge number.
True, it represents the lowest quarterly volume since Q4 2020 ($11.8 bn) and a drop of more than 30 per cent from Q2 2021 ($39.6bn) but on an absolute level, this is still big money that can fund big ideas.
In the UK, The fintech sector has seen a 24 per cent year-on-year increase despite a global slowdown in investments in the first half of 2022.
UK-based fintechs received $9.1bn in investment spread across 294 deals compared to $7.3 bn across 375 deals in the first half of 2021, according to Innovate Finance.
Contrast this with capital raising by public companies in the first six months of 2022 in the UK, which is less than 50 per cent of that in the first half of 2021, and around a third of the amount raised in the first half of 2020, according to data crunched by Goodbody.
In the first half of 2022, just £5.7bn in new capital was raised by UK listed companies, the slowest start to a year in nearly a decade. When excluding listed investment vehicles, this figure falls to £2.5bn.
Private company financing may actually be benefiting, according to FT Partners, owing to an IPO market that is essentially shut. However, it is also worth noting, they say, that there is a lag in the quarterly data with many deals announced during Q2 likely agreed upon some months prior.
Given the lag effect, a pronounced slowdown in activity in the months and year ahead seems highly likely. You don't need a crystal ball to see that 2023 is likely to be very tough.
Nonetheless, there a many interesting companies still raising enough cash to help them through this period. It is likely they will be using the time to focus on innovation in terms of digital products. Will larger banks be doing the same?
The central idea of fintech - that the combination of software, bold entrepreneurial ambitions and the notion that a company can create better and/or cheaper financial services - is not the same thing as ever-increasing venture capital volumes. While funding is an essential pillar of this, good ideas and founders will still prosper.