Monday, June 27

The Key Trends of Fintech

By: Ke Tang

The discussion of how technology can revolutionize the financial system is a heated topic. There is an increasing number of financial institutions starting to integrate their offerings and services with technology such as blockchain. As fintech (financial technology) and digitalization of the financial services industry are developing, fintech startups are facing more capital financing demand. SPACs provide a viable way for fintech startups to go public and acquire the funds necessary for expansion. The relatively easier operation and shorter timeline make fintech SPACs heated in 2021.

Two key trends of fintech are consolidation and digitalization, which is evidenced by the SPAC IPO of Dave. Fintech company Dave went public via a SPAC merger in early January 2022. Dave is an online app that helps people avoid overdraft fees, and it intends to raise funds to acquire other companies and expand its market presence. For a $1 membership fee every month, users can access checking accounts with no fees and enjoy up to $100 in overdraft fees with no additional fees or interest. Dave intends to provide services that traditional legacy banks cannot offer, and it intentionally uses the name “Dave,” which sounds like a name of a friendly neighbor, to indicate how the app can help and improve people’s lives. Dave has seen tremendous growth since its establishment, and it has already helped users avoid $1 billion in overdraft fees. In the long run, Dave aims to build a future financial hub for users by making acquisitions and launching new services.

The SPAC deal includes a $210 million private placement by Tiger Global Management with additional participation from Wellington Management and Corbin Capital Partners. The deal is sponsored by investment firm Victory Park Capital, and it values the banking app at $4 billion. On the first day of trading, Dave’s share price opened at $8.27, which gave a valuation of approximately $3 billion. Dave will use the fund to pursue M&A activities and expand its offerings through synergies.

To begin with, Dave’s intention of making acquisitions from the capital raised reflects the consolidation trend in the fintech sector. Consolidation helps fintech startups share, aggregate, and monetize data, which is one of the most valuable assets of a fintech company. Data are useful as they allow fintech companies to analyze the behaviors of consumers and make subsequent recommendations, and one major benefit of fintech is the ability to utilize data and customize customers’ journeys. 

Moreover, fintech startups are more willing to be acquired by established traditional financial institutions as government regulations are more stringent. While large insurance firms, banks, asset management firms, brokerage companies are all comfortable with the regulations, there exist significant regulatory risks for small fintech startups. The cost of navigating and mitigating those risks can also be enormous for small fintech companies. Therefore, fintech startups are more willing to be acquired by established financial institutions when facing stringent regulations. Larger companies will also be willing to purchase smaller companies to obtain key technology or bring modernized financial services under one umbrella. 

In 2021, with a lower interest rate, a benign credit market contributed to the increasing M&A activity in the fintech space. Going forward in 2022, although a rising interest rate expectation will increase the cost of debt, strategic M&A activities are not expected to dwindle as corporations expand their services via synergies. It is possible to see more M&A deals funded through equity, but an increase in interest rate is not enough to deter companies from pursuing M&A activities, considering the potential benefits that consolidation can bring.

The rapid expansion of Dave also sheds light on digital banking. While traditional banking is still the most important way for customers to engage in banking activities, and traditional banking is unlikely to be replaced by fintech companies, digital banking has developed rapidly. Accelerated by the pandemic, digital banking coincides with customers’ preferences, corresponds to the ideology of ESG, and offers data-driven personalized services. Avoiding in-person transactions and physical exchanges are some key changes that happened throughout the pandemic, and digital banking provides a way for customers to engage in banking transactions online. In addition, paperless is a key topic that corresponds to the commitment to SDGs, and digital banking promotes ESG initiatives by being more environmentally friendly. Lastly, digital banking can trigger the rethinking of how banks interact with their clients. Normally, banking for customers is driven by in-person interactions and less reliant on data. As fintech companies explore more effective ways to utilize data, digital banks can increase clients’ financial wellness by customizing their banking experiences. Digital banks will also recreate how customers’ journeys can improve online, and how new services can be applied to improve the process.

Lastly, it is worth mentioning that although Dave and the fintech industry, in general, have considerable prospects, there are still significant risks surrounding the industry. For example, Dave is still unprofitable until now, and its stock price has decreased to $5.23 so far, indicating an unideal performance. Most importantly, regulations surrounding fintech are still inadequate. For instance, in addition to significant operational risks regarding fintech companies, people are using concepts such as fintech and cryptocurrency to profit. Squid Game cryptocurrency is an instance where around $3.3M of investors’ money vanished. As college undergrads, although it is okay to be curious and motivated to explore more about fintech and cryptocurrency investing, it is necessary to keep in mind that this is still an emerging industry without mature regulations.