- The firesale of Credit Suisse to UBS is putting the banking world on high alert.
- Shiny fintechs that disrupted banking will need to reassure investors about their business models.
The swallowing of Credit Suisse after a historic week for the banking sector should raise the question for a batch of highly valued startups that want to disrupt finance: Am I next?
The saga that culminated last week in the $3.25 billion rescue of Switzerland's second largest bank by rival lender UBS all started after an off-hand remark from Saudi National Bank, Credit Suisse's largest shareholder, suggesting it had little intent of upping its holding.
A crisis in confidence ensued, sparking a huge share and bond price drop and customer outflows. A $54 billion loan from the Swiss National Bank wasn't enough to keep Credit Suisse afloat, and UBS stepped in.
It is the latest sign of a financial system that is cracking, after the collapse of Silicon Valley Bank.
Credit Suisse suffered idiosyncratic problems, such as a spying scandal involving former CEO Tidjane Thiam, as well as crises relating to its relationships with hedge fund Archegos Capital and financial group Greensill Capital. Its delayed annual accounts showed it was around $8 billion in the red, and ultimately it fell after a collapse in investor confidence.
But it is clear that sentiment can make or break a bank. And that should have lessons for the shiny, fast-growing companies that want to be banks, and have only known an era of easy venture capital money and low interest rates.
"There's already a lot of soul searching about what fintech business models are," says Paul Rolles, an ex-Morgan Stanley managing director and cofounder of money-management service HyperJar.
The party times are over
The fintech sector has been something of a darling of the startup world post-2008. The promise of technology-led businesses to shake up a staid, failed industry attracted huge amounts of investment.
But now these startups — worth $158.9 billion in 2022, per data firm IMARC Group — face their first real questions about the viability of their business models.
A vigorous chase for customers during the low-interest rate boom years of the 2010s allowed fintechs to focus on growth without too much focus on profit. Recent developments might sharpen investors' minds, as they have elsewhere in the tech world.
Rolles believes the banking issues of the past couple of weeks are as much about confidence as intrinsic issues.
"Back in 2008, the whole bank run was triggered off by US subprime mortgages but actually the amount of crap in the US subprime market wasn't that big," Rolles said. "It was the fact that it triggered a lack of confidence and therefore a bank run."
An SVB-style bank run on neobanks, whose central customer base has been consumers, is unlikely. Some of these newer players have benefited from the SVB collapse by seeing new demand from startups seeking to diversify where they hold their money.
Even so, there's a huge difference between being "a really good consumer marketing company" that attracts users and a fully regulated bank that acts as a massive lender. Firms such as buy-now, pay-later firm Klarna and neobank Monzo are not recently profitable, for example.
Though global investment into fintech hit $75.2 billion last year, per data from CB Insights, it marked a 46% drop in funding levels seen in 2021. In a 2022 funding round, Klarna took an 85% valuation haircut. Dutch VC firm Finch Capital predicted in October 2021 that the fintech bubble was set to burst.
"Everyone knows it's quite expensive to run a digital neobank," Rolles said. "The business model is what, exactly? Is it deploying deposits really effectively and lending? I don't think a lot of them have done much lending yet."
As Rolles notes, "actually building a lender" by dealing with a regulator, managing liquidity, hedging derivatives and overseeing short and long-dated assets is hard work.
"Maturity transformation is an art and a very complicated game," he added. "It's never been clear that those skills are being developed in the fintech sector."
Correction — March 20, 2023: An earlier version of this article said Klarna was not yet profitable. It was consistently profitable until 2019.