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Fintechs scale back and fold as funding channels dissipate

The high interest rate, low growth environment has made VCs and private equities more selective on where to invest

Financial technology (fintech) companies are facing a funding shortage that has forced many to scale back or fold operations, as venture capital and private equity firms turn more selective on their funding.

Fintechs’ “build now, profit later” business models will no longer fly in the current world of high-interest rates and lower growth potential, which has made venture capital firms and private equity firms more selective where to funnel their money, according to Moody’s Investors Service.

“Fintech momentum has slowed along with funding challenges and banks have upped their game in response to the fintech threat. They have enhanced their digital offerings and expanded their capabilities organically, through partnerships or acquisitions. Moreover, they have access to stable deposit funding given their well-established brands and customer relationships,” said Stephen Tu, a Moody’s vice president and senior credit officer.

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The lack of capital has weakened fintechs, and in some cases caused their demise, Moody’s noted. The ones most susceptible are those who were not profitable and who relied on existing banking architecture rather than offering a novel technology or product.

Incumbents have meanwhile closed the tech gap through strategic investments to enhance digital offerings.

Fintechs also still struggle with regulation in some markets, and it remains a costly barrier of entry for fintechs seeking a foothold in financial services. 

“In several developed economies, the climate for fintechs has become less favorable: regulators in Australia, for example, aim to tighten rules for BNPL, and in 2021 added requirements to the country’s licensing framework for new depository institutions,” Moody’s wrote.

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But whilst a large number of nascent fintechs with weaker business models will disappear, a handful will survive and prove truly disruptive over time, according to Tu.  Longer term, technology’s capacity to lower costs, increase efficiency and broaden inclusion in financial services remains.

“In particular, fintechs that are part of larger conglomerates or serve a niche segment, such as Australia’s Judo Bank, Brazil’s Nubank and Korea’s KakaoBank, are performing surprisingly well,” Tu said.

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