Fintechs tread lightly on equity banking in 2022

by James · January 4, 2023

The news: Fintech stocks and indices underperformed both broader financial services and technology in 2022, according to the Wall Street Journal.

Global X Fintech Exchange Traded Fund (ETF) – which tracks companies that Adyen, Confirmand Block– fell 52% year-over-year (YoY) last year.
But the Financial Select Sector SPDR Fund — which includes major banks and investment firms — fell just 12% year-over-year in 2022.
And the Nasdaq Composite index’s 33% drop still managed to outperform fintech-focused indexes.

How we got here:

High interest rates. The Fed raised interest rates seven times last year to curb inflation that reached levels not seen since the 1980s. Higher borrowing costs posed a major problem for fintech borrowers who Confirm and Upstart, which works with banks to finance customer loans. This put a heavy strain on their balance sheets and made them less attractive to investors.
General change in investor sentiment. The rising interest rate environment made investors less interested in the high-growth but unprofitable fintechs that had dominated investment and funding rounds. Worldwide fintech financing in H1 2022, it fell 23% year-on-year, per CB Insights data. Instead, many investors prioritized companies with profitable and less risky business models.
Excessive confidence in early pandemic shifts. Many fintechs grew rapidly at the start of the pandemic as consumers switched to online shopping and digital payments. But many predicted the growth would be permanent, which was not the case – while the pandemic helped accelerate e-commerce, growth eventually normalized as consumers returned to brick-and-mortar stores. As a result, many fintechs had to cut back on previous e-commerce-related investments and lay off employees from the 2020 and 2021 hiring rounds.

Why it’s worth watching: As a result of macroeconomic factors, several fintechs plan to take a more cautious approach to spending and investment.

Block, for example, has remained particularly quiet on cryptocurrencies – such as Bitcoin maximalist CEO Jack Dorsey had said it would be a large part of the company’s future. But the crypto winter and broader economic headwinds may have changed Block’s course. In its latest earnings, Block highlighted banking – a more stable segment – as a core growth opportunity.

Looking ahead, other fintechs may follow suit and moderate investments in riskier segments to preserve balance.