In the first installment of our monthly financial services update, we take a look at how financial institutions can sustain net interest margin growth, how fintech finished out 2022 and a rule proposed by the Consumer Financial Protection Bureau to create a registry of nonbank financial institutions.
Financial institutions pivot to sustain 10-year high NIM growth
Many financial institutions profited in 2022 from the Federal Reserve’s rate hike campaign. But as loan growth is expected to slow and amid signs of deposit attrition, financial institutions will need to pivot their strategy to sustain the high-water mark on their net interest margins.
Interest rates rose by an astonishing 425 basis points throughout last year. This upcycle combined with strong 10% loan growth among U.S. financial institutions resulted in NIM expansion of 23% in 2022. Variable-rate loans that re-priced during the year served as the cherry on top to support the augmentation.
Banks appear to be preparing for the moment that these factors collide with the expected pause in rate hikes. Federal Home Loan Bank advances have taken an early lead as a substitute for alternative funding, increasing by 136% through the span of 2022.
We expect this trend to continue strong in the first quarter of 2023. However, as institutions work to keep the cost of funding as low as possible, a ramp up in securitizations may subsidize the increase in FHLB advances. Securitizations would benefit institutions as a funding alternative while simultaneously reducing funding costs, ultimately creating a capital buffer to clear room on an institution’s balance sheet.
The state of fintech in 2022 was not quite comparable to 2021
Given the macroeconomic conditions in 2022, we had an inkling that the fintech ecosystem would not fare as well as 2021 in levels of funding, number of unicorns minted, and exit activity. A recent report corroborates this; global fintech funding fell to $75.2 billion in 2022, down 46% from the prior year, according to CB Insights State of Fintech 2022.
While the deal counts in 2022 and 2021 were comparable—5,048 and 5,474, respectively—this means the deal size fell by approximately 40% in 2022. In terms of new unicorns minted, we also saw a steep decline to 69 fintech unicorns, down 58% from 166 fintech unicorns in 2021. Fewer unicorns minted led to fewer public listing exits of only 32 combined initial public offering and special purpose acquisition company deals in 2022 compared to 101 in 2021.
So, do the 2022 global fintech numbers indicate fintech interest is waning? Not quite.
It’s true that 2021 was a banner year for fintech, which commanded one out of every five venture dollars invested. It was also a year of record unicorn minting and exit activity. However, comparing last year to 2020, funding was up 52% in 2022, and there are flatter differences in the number of unicorns minted and exit activity.
Moreover, the broader trends driving fintech disruption—such as e-commerce adoption, mobile and online banking, digital payments, mobile investing, and higher expectations for a frictionless customer journey—remain in place. Even though economists anticipate headwinds this year, we foresee fintech returning to be one of the darlings of the venture capital ecosystem.
CFPB proposes registry of nonbank financial firms
The Consumer Financial Protection Bureau in January proposed a rule that would increase public transparency and oversight of nonbank financial institutions by establishing a public registry of contract terms and conditions that waive or limit consumer rights. The move represents the increased demand from organizations for a response to the changing technology landscape in the financial services industry.
As the collection of consumer data and personal financial data becomes more commonplace, banks, regulators and now fintech companies are navigating what various rules and regulations mean for how they use consumer data. The registry will be open to the public and updated annually, and fintech companies may need to register with the CFPB under the new rule.
The proposal comes as investment in consumer finance technology has dropped; in January, capital invested in this space was down 98% compared to January 2022, according to Pitchbook data, at $1.5 million and $135 million respectively.
To prepare to adhere to the proposed rule, organizations should consider the following:
- Review all consumer-facing form contracts to ensure they do not violate any current or proposed prohibited, void, or restricted contract terms.
- Identify any potential risks within terms and conditions
- Determine if modifications are needed
- Identify comments, if any, to the proposed rule as they must be submitted by March 13, 2023.
