M&As, Alternative Funding Keep FinTechs Afloat Amid Ongoing Economic Shake-Up

The FinTech industry has experienced significant growth in recent years, but it is has not been immune to economic headwinds.

In fact, rising interest rates, high inflation, and lower consumer spending have led to a sharpened focus on belt-tightening among venture capital (VC) investors in the last year, putting pressure on FinTech companies as they make a painful pivot to profitability.

The fast-growing buy now, pay later (BNPL) sector, in particular, has been affected as higher interest rates have made it difficult for providers to offer interest-free payments, leading to major losses for key players. From Klarna and Affirm to Zip, both stock prices and valuations have plummeted, accompanied by a widespread trend of mass layoffs and cost-cutting strategies.

In this challenging environment, alternative options like angel investing, government funds, and corporate partnerships are gaining traction and being used to complement traditional methods of funding as FinTechs seek new avenues for growth and survival.

Angel investing, for instance, has surged in popularity in recent years, emerging as a vital player, says Angela Lee, founder of 37 Angels and a VC professor at Columbia Business School.

This is thanks in part to mainstream media: “It has just exploded. ‘Shark Tank’ is the most watched [TV] family show in the world, and that means a lot of people have been introduced to this investing class that they didn’t know about a decade ago,” Lee told PYMNTS in a recent interview. 

Consequently, she said angel investing has evolved from a side gig to become “more professionalized, almost institutionalized as an asset class” that is sought after by an increasing number of founders today. 

Finally, Lee said there is a shift toward diversity, equity and inclusion (DEI) in the space driven by both demand from limited partners (LPs) providing investment capital and their increased interest in socially responsible investments. These factors, coupled with a growing concern for impact and transparency, are reshaping the dynamics of the rapidly expanding angel investment landscape.

FinTechs Look to M&A

According to a recent “FinTech Tracker® Series Report” published by PYMNTS, banks and FinTechs, once fierce competitors, are dropping their guard and joining forces in mutually beneficial alliances and partnerships.

As a result, “some FinTechs are profiting substantially from acquisition by banks,” the report noted.

NatWest Bank’s acquisition of British workplace savings and pension firm Cushon earlier this year for $174 million is a prime example, as well as a recent partnership deal between Citizens Bank, one of the largest FIs in the U.S., and FinTech Wisetack to offer BNPL loans to small to midsized businesses (SMBs).

“It has now become apparent to the FinTechs that the banks have opportunities to be the backbone of lending and/or financial services. And then [the FinTechs] get to be the frontman. … That can be a very symbiotic relationship. We bring the capabilities of a massive institution of lending and regulatory control. They bring the creativity of FinTech and customer experience and technological connectivity together,” said Christine Roberts, president at Citizens Pay, per PYMNTS.

FinTech leaders are also making acquisitions of their own, the report added, pointing to the June acquisition of embedded finance startup Bond by FinTech giant FIS.

Additionally, startups like money transfer FinTech Zepz are pursuing M&A strategies to accelerate growth, expand into new markets, and compete with larger rivals.

Governments Lend a Hand

Amid the turmoil in the FinTech and broader startup communities, governments have stepped in to lend a hand.

One initiative is the recently launched £1 billion UK Fintech Growth Fund, which aims to support growth-stage financial technology companies until they can go public.

Backed by major industry players including Mastercard, Barclays and the London Stock Exchange Group, this fund is part of a government-led strategy to address the challenges faced by the sector and encourage FinTech firms to list in the UK.

The fund aims to invest between £10 million to £100 million in a range of FinTech companies, including challenger banks, payments tech groups, financial infrastructure providers, and regulatory technology firms. This diverse portfolio ensures that the fund supports various segments of the FinTech ecosystem, PYMNTS reported.

But it’s not just governments providing funds to assist FinTech entrepreneurs.

In June, Discover Bank debuted a $36 million fund for startups focused on financial health, with the goal to back companies assisting low- and moderate-income people, communities and small businesses in the mid-Atlantic region.

“As technology continues to evolve, we want to fund entrepreneurs who have identified creative ways to benefit those of modest means,” Matthew Parks, vice president of Discover Bank, said at the time. “It is our expectation that these technologies can both be profitable and beneficial to the community.”