Last week, UBS acquired Credit Suisse in a $3.25 billion rescue deal. This event has raised concerns about the viability of business models of highly valued fintech startups.
The banking sector has faced a crisis in confidence, with Credit Suisse’s collapse coming after the collapse of Silicon Valley Bank. This latest development has led to questions about the future of fintech startups worth $158.9 billion in 2022.
“The business model is what, exactly? Is it deploying deposits really effectively and lending? I don’t think a lot of them have done much lending yet.” – Paul Rolles, ex-Morgan Stanley managing director and co-founder of money-management service HyperJar.
An Influx of Fintech Startups
The fintech sector has been a darling of the startup world since 2008. The promise of technology-led businesses to disrupt the staid and failed finance industry has attracted significant investment. Fintechs worth $158.9 billion in 2022, according to data firm IMARC Group, have seen their first real challenges to the viability of their business models.
A vigorous chase for customers during the low-interest rate boom years of the 2010s allowed fintechs to focus on growth without too much emphasis on profit. Recent developments might sharpen investors’ minds, as they have elsewhere in the tech world.
The Collapse of Credit Suisse
Credit Suisse’s collapse was due to idiosyncratic problems, such as a spying scandal involving former CEO Tidjane Thiam, crises relating to its relationships with hedge fund Archegos Capital and financial group Greensill Capital, and its delayed annual accounts, which showed it was around $8 billion in the red.
Ultimately, it fell after a collapse in investor confidence.
The Collapse of Silicon Valley Bank
The collapse of Silicon Valley Bank was also due to a crisis in confidence. It highlights the importance of sentiment in the banking sector. The collapse triggered a lack of confidence and a bank run. There are lessons here for fintech startups.
“Back in 2008, the whole bank run was triggered off by US subprime mortgages but actually the amount of crap in the US subprime market wasn’t that big. It was the fact that it triggered a lack of confidence and therefore a bank run.” – Paul Rolles, ex-Morgan Stanley managing director and cofounder of money-management service HyperJar.
The Future of Fintech Startups
An SVB-style bank run on neobanks is unlikely, but it is clear that there is a huge difference between being “a really good consumer marketing company” that attracts users and a fully regulated bank that acts as a massive lender.
Firms such as buy-now, pay-later firm Klarna and neobank Monzo are not recently profitable. Although global investment into fintech hit $75.2 billion last year, per data from CB Insights, it marked a 46% drop in funding levels seen in 2021.
“Everyone knows it’s quite expensive to run a digital neobank. The business model is what, exactly? Is it deploying deposits really effectively and lending? I don’t think a lot of them have done much lending yet.” – Paul Rolles, ex-Morgan Stanley managing director and co-founder of money-management service HyperJar.
The Bottom Line
The collapse of Credit Suisse has raised questions about the future of fintech startups. Fintechs have attracted significant investment, but their business models have not been fully tested.
It remains to be seen how they will cope in a crisis of confidence. As Paul Rolles notes, “actually building a lender” is hard work. It involves dealing with regulators, managing liquidity, hedging derivatives and overseeing short and long-dated assets is hard work.
“Maturity transformation is an art and a very complicated game,” he added. “It’s never been clear that those skills are being developed in the fintech sector.”