(Finance) – Il fintech sector was on the crest of a wave for almost a decadewith i zero interest rates which favored billions in venture capital funding for companies that promised to revolutionize the banking and payments sector, leading to staggering valuations for the most prominent names, such as N26 and Revolut. The wave of innovation, enthusiasm and financing also involved a heterogeneous set of banks, the so-called challenger banki.e. small and recently established institutions, which aim to directly compete – or challenge – traditional banks using technological tools and innovative processes. Now, however, the abundance of funding has come to a halt due to rising interest rates by central banks and doubts about some of the business models of these challenger banks, which although they have attracted millions of customers often struggle to make a profit. profit.
Negative signals for the sector they arrived at the beginning of October, when the British Metro Bank, founded in 2010 and focused on retail customers, was forced into a capital increase and debt refinancing. The deal came after a series of setbacks in recent years, including accounting errors, leadership departures and delayed regulatory approval for major capital relief.
Capital and funding management is a sensitive issue not only for challenger banks in difficulty, but also for investors growing institutions facing a totally different macroeconomic and monetary policy environment from that of a few months ago.
CF+ Bankan Italian challenger bank specializing in financing solutions for companies in performing or re-performing situations, placed its first bond issue, a Tier 2 with a nominal value of 25 million euros, with maturity in 2033 and an annual coupon of 14.5%. The CEO Iacopo De Francisco underlines that “professional and qualified investors have evidently appreciated our project” and believes that the coupon offered “is consistent with the reference market, considering both the absolute level of interest rates and the complexity of the macroeconomic and international context”.
However, De Francisco highlights that competition with the big banks “has a cost, since theand challenger banks do not enjoy the same funding conditions as the traditional banking systemcharacterized by a high level of resilience of retail funding at costs not always linked to market dynamics”. To fill this gap, according to the banker, it is necessary to offer “also on the funding front diversification, customisation, speed, economic convenience – in a word a very positive user experience – which over time also allows the online depositor to “get attached” to the bank, embrace the project and not focus only on the return offered”.
That of the pricing is an important element, because i retail customers they are looking for better-paying products and the number of options has increased after the ECB’s decisive monetary tightening. According to a recent report by Scope Ratings, European banks are facing “disruptive” dynamics in retail funding and poor management of the new scenario could have “structural implications for profitability and asset-liability management, including the increase of loan/deposit ratios and greater dependence on wholesale financing”.
“The market has changed profoundly in the last 18 months, also because we went through a financial context in which liquidity was abundant, at zero cost (official rates were negative for a long time), and in which many banking institutions almost refused deposits of liquidity from customers – he points out Stefano AldrovandiHead of Core Banking BU and Wealth Management BU at Cherry Bank – Today liquidity has returned to being an asset, especially if stable over time“.
“There stable collection and today rewarding and one of the main sources for stabilizing it are time deposit accounts”, adds the manager of Cherry Bank, which does not describe itself as a challenger bank and is active in various market niches (NPL, Tax Credits, Special Situation and Alternative Investment), but also in more traditional sectors such as Corporate and Wealth Management.
Clearly defining a challenger bank is in fact not easy, because it could be referred to small banks (who have branches and aim to broadly challenge the big banks on their territory by providing better services and/or products to specific customer groups or in general), digital banks (which aim to engage customers digitally, betting on changes in customer behavior away from branches towards faster and more efficient services) or specialized banks (which often have no branches and try to target particular customer groups or products that are less of a focus than traditional banks). “I am convinced that managing a challenger bank can be, on the one hand, easy, not having the weight of a legacy behind it, and on the other more difficult, since it is necessary to create a presence on the market – states De Francisco – In a moment of market discontinuous like the current one, however, the attackers manage to have space“.
The attack on market shares by traditional banks will soon enter a new phase, following that of zero rates and high rates, that is, the one in which a high cost of money has a significant effect on the slowdown of the economy. “At the moment, the newfound scenario of official rates around 4% has been a boost for the banks’ income statement, having increased interest income and, in a less than proportional manner, interest expense – states Aldrovandi – This The placebo effect, however, has some repercussions that will be seen in the coming months, if and when the announced economic crisis begins to bite and the structurally weaker companies are unable to overcome the difficulties. Furthermore, in our expectations there is also the growth in the cost of collection traditional due to the scarcity effect of liquidity and, consequently, competition”.
This new scenario will also have to be addressed without the prospect of new capital injections from funds and venture capital, whose investments in the financial and fintech sectors have dried up after years of abundance. “In Italy, fintech in recent years has gone from not being a reference sector to being the first sector in terms of investments, with a growing trend – he explains Giovanni Fusaro, head of the Venture Capital area of AIFI and project manager for the Venture Capital Monitor (observatory of LIUC Business School and AIFI) – In 2023 there was a generalized slowdown, which actually started at the end of 2022, in venture investments. The theme is that the largest deals, even in fintech, were made by international funds, and their global slowdown was also reflected in Italy.”
According to data from the Venture Capital Monitor, VC investments in Italian fintech startups have collapsed to 14 in number and 81 million euros in value in first 9 months of 2023, compared to 34 and 624 million euros for the whole of 2022 and 37 and 218 million euros for the whole of 2021. The great growth in the last few years could however have brought structural changes in the sector, which could restart when the global situation improves it will reassure. “Fintech is the one that has grown the fastest and attracted the most capital in recent years, and therefore potentially is the one that could attract more“, adds Fusaro.
(Photo: Towfiqu barbhuiya on Unsplash)