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The banking sector took over US headlines on March 10 when Silicon Valley Bank (SVB) collapsed, prompting US Federal Reserve/Federal Deposit Insurance Corporation (FDIC) intervention two days later. In the wake of this failure, investors have wondered what the ripple effects may be, and which sectors would be hit the hardest in the aftermath of this tech-focused bank failure.
There are undoubtedly short-term headwinds that could weigh on the fintech industry following the collapse of SVB and other banks. There is now a higher probability of recession, which would likely slow consumer spending if it were to occur. In the wake of SVB and other banks failing, bank spending on technology is also likely to decrease, weighing on an important end market for some fintechs.
However, I believe that there are also some long-term positives for the industry that will matter more to value creation over time. This may be particularly true for the well-funded public market incumbents that have been pressured in recent years by disruption narratives oriented around private market competitors.
Before it became the subject of the second-largest bank failure in US history, SVB had a customer base heavily weighted toward tech companies and venture-capital (VC) funded startups. Some of these (mostly private) companies had already been strained by slowing end markets, bloated cost structures, rising interest rates, and valuation marks that still need to come down significantly. Any more pressure applied after SVB’s failure will likely be a positive for fintech incumbents and could diminish the disruption narrative going forward.
More fundamentally, a tighter funding environment would cause some less competitive private companies to fail, while companies that endure will be more focused on profitability going forward. We expect a focus on profitability to drive prices higher across the fintech industry, while a reduced focus on growth at all costs will lower incremental customer acquisition costs throughout the industry. Higher prices and lower customer acquisition costs could help offset recessionary pressures from reduced consumer spending.
This, coupled with my belief that balance sheets and cash-flow characteristics of public technology companies remain generally strong, furthers my confidence in public fintech companies, despite the banking sector shakeup.
We’ve already seen prices rise across the industry after several years of lower pricing power due to increased competitive intensity and a desire to avoid imposing higher prices on merchants during the COVID pandemic. For example, companies that used to monetize solely through payments take rates are increasing software prices while companies that offer interchange rebates in B2B payments are lowering the value of those reward schemes. Additionally, value-add services that were implicitly included in take rates are now being priced separately. This trend is likely to continue.
The venture capital boom of the past five years has also enabled the creation of many compelling technology assets, some of which are not viable standalone businesses. As the venture capital space cools and valuations inevitably get marked-to-market, opportunities for public incumbents to purchase these good technology assets could increase.
The combination of increased pricing power, reduced customer acquisition costs, and an M&A environment more conducive to reasonably priced technology deals could all drive improved sentiment and higher multiples over the medium term for fintech incumbents.
Another reason why I’m confident in the post-SVB future of fintech is that customer acquisition dynamics are improving both directly and indirectly. The direct competition for new customers has decreased as management teams deemphasize growth and focus on profitability.
On an indirect basis, competition for advertising has declined, especially among more consumer-oriented companies. For example, crypto companies have dialed back their fintech-oriented keyword searches significantly, which could give non-crypto-related fintech companies (for example, remittance providers) a boost.
Of course, for all of these positives to be realized, earnings estimates will likely need to come down as we enter a more difficult macro environment. Since SVB’s failure, the likelihood of recession has ticked up, and now I expect recession to begin either later this year or early next, which means there are greater risks to second-half 2023 estimates now than there were before March 10. Future earnings estimates across the broader market may come down, and fintech companies won’t be immune. However, in the meantime, I expect first-quarter 2023 results to be generally healthy across the fintech industry because consumer spending remained resilient through March (despite some emerging signs of weakness).
Even if broad market volatility ticks up and earnings falter this year, I believe that there are resilient fintech companies with the potential to withstand a weakening macro environment. These companies could see material positive offsets to a worsening macro environment because they may benefit from decreasing competitive intensity in the industry, better pricing power, lower customer acquisition costs, and more attractive M&A opportunities.
On the whole, I think that the recent US banking sector situation could be a positive for fintech companies over the long term, especially among longer standing, established incumbents in the public investment universe.
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