Competition between fintechs and banks cools: Moody's

The competitive threat of financial technology companies to big banks diminished over the past year as rising interest rates constricted funding, a new report from Moody's Investor Service found.

A decline in venture capital funding in 2022 particularly hurt fintech firms that rely on outside capital to fund their operations and acquire clients, Moody's analysts wrote in the report on Wednesday.

The report cited figures from CB Insights that showed global fintech funding fell 46 percent from 2021 to 2022.

Traditional banks that have long benefited from established brands and customer relationships have accessed stable deposit funding over the past year, which has given them an edge over many fintech companies, according to the report. 

Stephen Tu, VP and senior credit officer at Moody's said, "Fintech momentum has slowed amid funding woes and banks have upped their game in response to the fintech threat. Banks have enhanced their digital offerings and expanded their capabilities organically, through partnerships or acquisitions.

“Moreover, they have access to stable deposit funding given their well-established brands and customer relationships.”

Banks have long recognised that technology could disrupt business models and allow technology conglomerates to enter banking, Moodys said.

Fintech companies often face more regulatory obstacles than banks and may have encountered new requirements in certain jurisdictions in recent years, according to Moody’s.

In Australia, for example, regulators in 2021 updated the country’s licensing framework for new depository institutions and are considering how to bolster their oversight of consumer credit.

But although the current macroeconomic environment may pose challenges to fintech companies, the sector still has the potential to increase financial inclusion and lower costs to consumers, the report found.

As has happened in previous market cycles, it is likely that a large number of nascent fintechs with weaker business models will disappear, the report noted. But a handful will survive and prove truly disruptive over time. 

"In particular, fintechs that are part of larger conglomerates or serve a niche segment, such as Australia's Judo Bank, Brazil's Nubank and Korea's KakaoBank, are performing well," Tu added.