The threat that fintechs pose to the traditional financial industry is receding, but the culprit is tighter financial conditions, rather than superior execution by the old school firms, says Moody’s Investors Service.
In a new report, the rating agency said that the competitive threat that incumbent financial institutions face from fintechs has diminished in many markets over the past year.
Upstart online banks have pulled out of tough markets such as the U.S., while others have laid off employees, or shut down completely.
While some of this decline for fintechs has come in the face of competitive responses from traditional firms, the shifting financial conditions are the primary culprit, the report suggested.
“As capital has become more selective in the current rising interest rate and slower-growth environment, many fintechs, lacking the more stable funding of established institutions, have scaled back operations, especially those taking a ‘build now, profit later’ approach,” it said.
The weaker macroeconomic environment has exposed flawed business models, it noted, leading venture capital and private equity firms to reduce funding.
“The lack of capital has weakened fintechs, and in some cases caused their demise, including many that were not profitable and relied on existing banking architecture rather than offering a novel technology or product,” it said.
Additionally, the tougher financing conditions have favoured traditional banks that have the advantage of stable deposit funding, which is supported by their established brands and long-standing customer relationships.
“Fintechs that are part of technology conglomerates have generally fared better than those independents mainly funded through private capital,” it said.
At the same time, in some markets, the regulatory climate has become less welcoming to fintechs, the report also noted.
Despite the recent swing in the competitive landscape, the potential for technology to transform finance means that the fintech threat likely isn’t dead forever.
“Longer term, technology’s capacity to lower costs, increase efficiency and broaden inclusion in financial services remains,” it said.