ithin the venture capital and startup landscape, fintech is king. In 2021, VC investment in U.S. fintech companies roughly doubled. Last year, roughly one-third of all new unicorns were fintech companies.
Considering the sector’s dominance, one would expect fintech to have a rosy outlook in 2022 after U.S. VC firms just raised a mind-boggling $128 billion of capital in 2021.
But all of that promise is now being called into question, with the chaos that has, and could continue to play out in the public markets. It’s been a blood bath for public fintech stocks. Cathy Wood’s Ark Fintech Innovation exchange-traded fund is down more than 45% over the last six months.
Markets on the whole are not doing well, either. Partly due to Russia’s invasion of Ukraine. But the Federal Reserve has now officially begun raising its benchmark overnight lending rate - the first time since 2018.
Furthermore, the Fed indicated that it could raise its benchmark rate another 10 times in 2022 and 2023. And may also reduce its balance sheet later this year, which would effectively remove liquidity from the markets.
Are the cracks starting to show?
According to Crunchbase data for the two weeks of Feb. 21 to March 7, roughly 51 fintech companies raised more than $1 billion in seed funding globally from VCs. But in the two weeks prior to that period, 80 fintech companies had raised nearly $3 billion.
Of course, it’s not just fintech taking a hit. Funding in the private markets has also slowed in February after a strong month in January.
“I think the market pullback is here,” Ryan Bloomer, a managing partner at K50 Ventures, told Crunchbase in early March. “I think what we saw happen in the public market is leading the private sector to a big dose of reality.”
Many are also wondering if valuations in the private markets will take a hit with what’s going on in the public markets, although investors may also punt to see if things rebound later this year.
Here are some examples of fintech companies that have gone public in recent years and their valuations from their peak to current levels:
- Coinbase: $73B → $38.9B
- Nu Holdings: $50B → $34.5B
- Robinhood: $60B → $11.6B
- Affirm: $48B → $10.5B
- Upstart: $32B → $9.8B
- SoFi: $18B → $7.4B
- Dave: $5B → $2.96B
- MoneyLion: $2B → $583M
Chime’s Sudden IPO Delay
Another big hit to the fintech sector came in February when Forbes reported that Chime, the star of the U.S. fintech sector, had decided to wait before going public until later this year. The company had reportedly been gearing up for a massive IPO valued in the realm of $35 billion to $45 billion.
It’s likely no coincidence that Chime decided to delay the IPO with fintech stocks getting obliterated right now.
Chime first came to prominence by offering zero-fee checking accounts and has reportedly brought in 12 or 13 million users. In 2021, Chime supposedly generated roughly $1 billion in revenue, according to an anonymous source cited by Forbes. The anonymous source also said Chime plans to release new products such as lending or investing capabilities.
Chime has shown signs of profitability, according to CEO Chris Britt, although has not been consistently profitable.
The push for more products is not super surprising because it can be tough for fintech companies to be profitable mainly by offering depository accounts and by collecting fees from the interchange on purchases. Lending is where the real money is made, although it also comes with much more risk and scrutiny.
Investors have applied a much stricter approach to unprofitable public fintech stocks in recent months. Revenue multiples are no longer being awarded and while growth is important, the market wants to see a clear path to profitability.
The market is also concerned about fintech companies operating in the consumer realm because rising interest rates and sustained inflation could result in much higher loan losses.
Chime’s delay is another blow to confidence in the fintech sector and further supports the idea that valuations could be reassessed and that funding might not flow as freely into the sector.
Current thoughts on 2022
Despite all of the challenges being faced, the outlook on fintech is still more or less tipped favorably. Investors are sitting on tons of dry powder that they will want to deploy. Insider Intelligence in January predicted that fintech funding will exceed the $132 billion raised in 2021 and jump past $150 billion in 2022.
That’s definitely still in the cards when you think about the growing need for fintech. Blockchain continues to get more and more ingrained into society, while traditional banks further recognize the need for innovation in-house and fintech partnerships.
Furthermore, large tech companies continue to deploy embedded finance solutions for their customers and employees, which they need fintech companies for. But valuations simply may have gotten out of control last year.
“If you are a special company, you are still getting the valuation you want,” Telstra Ventures Mark Sherman told Crunchbase. “But I would say the more ‘meat and potato’ companies are probably down 20 percent in January-February in relation to November-December—some more, some less.”
As the fintech landscape gets more competitive, companies are likely going to need to show they can do more than just get customers to download their app – profitability and a unique competitive advantage are much more important now.
The pandemic has still accelerated the way people interact with payments, money, and banking, creating an even bigger opportunity for fintech, but we’re also seeing the sector grow increasingly crowded, and just offering an online checking account is not going to cut it anymore.
A big year for fintech in 2022 is still possible, but there’s going to be more scrutiny than in the past two years and the bar has gotten much higher.
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