Fintechs lose $500 billion

There are worries that digital enterprises that flourished during lockdowns cannot survive a recession.

Nearly a half-trillion dollars has been knocked off the valuations of once-soaring financial technology businesses that capitalised on the IPO boom earlier in the epidemic.

According to statistics from CB Insights, more than 30 fintechs have gone public in the United States since the beginning of 2020, as investors raced to firms they felt might benefit from a long-term move toward digitalisation expedited by the epidemic.

Concerns about increasing interest rates, lack of earnings, and unproven business concepts as the economy approaches a potential recession have placed these stocks at the forefront of this year's sell-off.

Compared to the Nasdaq Composite, shares of freshly listed fintechs have declined by an average of more than 50 percent since the beginning of the year, according to a study by the Financial Times. In 2022, their total market capitalization decreased by $156 billion. If each stock's decline is measured from its all-time high, almost $460 billion has been lost.

Upstart's second-quarter statement last week exemplified the difficulties faced by many fintechs. The firm, which claims to utilise artificial intelligence to make consumer lending choices, blamed the "turbulent economy" for stifling revenue growth and causing losses.

This was worsened by the comparison to an extraordinarily good performance in the same quarter of the previous year, when the contrast with economic stagnation in 2020 resulted to yearly revenue increase of almost 1,000%.

Established firms like as PayPal and Block — previously Square — have lost about $300 billion in market capitalization this year due to the challenges.

The drop in public market values has affected private enterprises as well. In a private investment round earlier this month, Klarna reduced its value from $46 billion to less than $7 billion, while the Wall Street Journal reported this week that Stripe had reduced its internal valuation by more than a quarter.

The analyst at Mizuho, Dan Dolev, stated that fintechs, particularly digital payments providers, were "the first segment of the IT sector to benefit tremendously from Covid since everyone was at home buying things online."

Currently, they are overcorrecting to the negative before other sectors.

Dolev stated that he anticipated a second-half resurgence for many corporations as year-over-year comparisons grow more favourable.

Some businesses are further subject to regulatory pressure. The Securities and Exchange Commission is examining apparent conflicts of interest generated by "payment for order volume," the primary source of revenue for online broker Robinhood, and SEC chairman Gary Gensler has advocated for more transparent monitoring of cryptocurrency markets. In December, the Consumer Financial Protection Bureau also initiated an investigation into "buy now, pay later" companies.

The results of traditional financial services have also been impacted. Wells Fargo cited a $576 million write-down in its investment portfolio as the reason for missing analyst revenue projections on Friday. According to CB Insights, Wells Fargo Strategic Capital was one of the major investors in fintechs in 2017.

Despite the numerous obstacles, several investors continue to support the sector. ARK Fintech Innovation ETF, one of the most popular sector-specific funds managed by Cathie Wood, has declined 62% this year, although net withdrawals have been less than $90mn, dwarfed by the $2.7bn inflows over the previous two years. Since the beginning of June, investors have contributed a net $31mn to the company's coffers, following a steep decrease earlier in the year.

Pedro Palandrani, director of research at Global X, which operates another fintech-focused exchange-traded fund (ETF), said: "It's likely that some of these companies will continue to face pressures throughout the remainder of 2022 — rising interest rates will create difficulties for companies on the lending side of things and [buy now pay later] in particular."

However, he noted that "despite the elevated risks in the market, we're only down around $40mn in net outflows year to date. This demonstrates that investors continue to have a strong long-term belief in this industry."

By fLEXI tEAM