The sudden collapse of Silicon Valley Bank, also known as SVB, has caused plenty of shock, but the fallout has yet to run its full course. What the loss of this top 20 bank means for the commercial banking space remains to be seen, but it looks like the Fed and other powers that be are doubling down on stabilizing things and avoiding wider contagion within the global banking environment. The impact on the tech world—in particular, fintech—however, is even more of a wildcard.
Regardless of the outcome, it is likely that recent events will be seen as a milestone in the tech startup space. At the very least, they will serve as a vibe shift as banks, fintech companies, and regulators adjust to an altered landscape, where scrutiny is high and liquidity is tight. While the freewheeling, cheap money days are over for fintech for now, the need for fintech capabilities is only going to keep growing, and the market will adapt to these new conditions.
Aite-Novarica Group will be following these developments closely, but at this point it is safe to assume a few likely impacts for the broader bank-fintech partnership ecosystem as well as some implications for the wider financial services landscape. These likely impacts will be felt in a variety of different ways ranging from the immediate to longer-term shifts.
- Existing bank-fintech partnerships will be under intense scrutiny in the near term. Fintech vendors should be highly communicative with banking partners, particularly around their financial health, existing financial institution (FI) partners, and contingency planning. Communication will remain key. Even for more established partnerships, especially with smaller fintech vendors, banks should be undertaking audits of relationships in place and pinpoint any potential pain points. Staff at all levels should brace themselves for more questions from the C-suite.
- Expect to see large financial institutions make a big play to attract potential fintech and tech clients and partners. This move will likely come as many fintech firms scramble to rebuild or reenvision their existing banking relationships, both in terms of providers of underlying banking services, as well as with their own deposit-taking institutions. Tier-1 FIs will be an attractive and logical next step for many fintech vendors (and their venture capital funders). Many large FIs have posited they want to become the Amazon Web Services of fintech—expect to see a renewed play here during current market churn.
- FIs should not assume all fintech vendors will gravitate to Tier-1 establishment bank providers and partners. Startup culture runs deep among fintech and tech companies; many will continue to seek alternatives that are more in line with their attitudes toward disruption and technological revolution. This may create opportunities for other bank partners, including regional banks and alternative providers. Early reports suggest that even neobanks and alternative providers such as Mercury and Brex have seen a major client influx as a result of the challenges at SVB.
- Fintech startups should become more forthcoming about support from banking partners. Agency banking models, sometimes referred to as Banking-as-a-Service, where banks provide the underlying plumbing and regulatory compliance that fintech startups need, have long been an open secret in the market. The “next big thing” in fintech has often been powered behind the scenes by established FIs with a less trendy image, but these relationships have typically been underplayed in broader marketing messages about these fintech companies being revolutionary and disruptive upstarts. Expect to see this situation flipped—fintech vendors will likely become more vocal about their banking partners as they seek to gain an image of gravitas and stability with clients and prospects.
- Due diligence is only going to get harder. Compliance is a, if not the, critical plank when navigating potential bank-fintech partnerships. While information security (InfoSec) and technical due diligence will not go away, other factors will become increasing priorities. Risk, financial and commercial due diligence (including cash runway), and governance structures have always been important, but they will be moving up on the agenda.
- Expect to see further acquisitions in the near term of fintech vendors and their related technologies. The fintech winter that began in 2022 with a slowdown in venture capital investment looks like it will continue for the time being. This suggests that there may be opportunities for market consolidation, whether that is through bank acquisitions or via competitor market roll-ups.
- Market turbulence will likely lead to a slowdown at the very least in new market entrants and angel round investments in fintech. This could give some valuable breathing room for more mature fintech vendors to grow their market presence. Proven track records and a history of stability, particularly through rocky periods, will become increasingly powerful marketing messages.
- Integration into legacy infrastructure remains a key pain point in bank-fintech relationships. From the bank perspective expect to see a renewed focus on solutions which are easier to implement and integrate with other fintech partners, in turn achieving best-in-class capabilities. Many banks will want reassurances that, should a fintech partner face troubles, they can be removed or swapped out with less fuss. This could vary from extended usage of fintech marketplaces such as those now offered by many core and digital banking providers, through to the use of more containerized bank capabilities and fintech enablement platforms.
- Fintech platform architecture is likely to continue to change as cloud capabilities, API connectivity, and containerization of services become more important to fintech vendors. From the fintech perspective, being able to add or change banking and payment providers quickly and easily—essentially commoditizing these relationships—will become more valuable to investors and end customers alike. Likewise, expect to see more diversification in banking relationships, with fintech firms working with multiple providers, both as deposit holders and as agency bank providers.
- Expect to see renewed focus among larger fintech firms on gaining their own full regulatory compliance, all the way through to bank licensing, wherever possible. While this is easier to achieve in some jurisdictions than others, namely the EU vs. the U.S., this is likely to be a global push to greater self-reliance across many fintech startups. Fintech organizations that can operate more individually will be less prone to challenges with their bank partners. Likewise, this may give a push to regulators on fintech regulation and drive them to formalize initiatives such as fintech sandboxes and access to payment rails.
As the fintech market—and the broader technology landscape—goes through a period of turbulence, forecasts of the death of fintech are way premature. The underlying drivers of fintech from the demand side remain unabated, even if the supply side faces struggles. The shift to greater automation, personalization, usability, and embedded capabilities, not to mention the ongoing shift to data-rich and cloud-driven business processes, means the need for new technologies and innovation in financial services will carry on.
Fintech as a sector will make it through the fintech winter, and the market as a whole, including FIs and bank partners, should be prepping itself for the inevitable return of fintech spring.
To learn more about how the commercial banking fintech ecosystem is evolving, read my recent reports The Benefits of Fintech Enablement: New Approaches to Ongoing Innovation and Commercial Banking Fintech Spotlight: Q4 2022.