The rushed bank rescues and failures of the last two weeks have raised the spectre of the 2008 global financial crisis in some quarters. It might be an excessive reaction, but the banking industry will certainly look back on this time as a turning point. An end to easy money will only accelerate changes across the sector that were already under way.
Most worrying is the way in which the collapse of Silicon Valley Bank and rushed rescue of Credit Suisse underline how much banking relies on trust. For some, recent events have bolstered the case for central bank digital currencies (CBDCs), which would be a replacement for bank deposits and not just an alternative to private-sector payment systems.
Governments have, up to now, been wary about undermining traditional bank intermediation with CBDCs. The public remains more sceptical about the worth of private digital currencies than it was a few years ago. But a widespread banking crisis could precipitate more revolutionary CBDC projects.
Remember that the original Bitcoin white paper came out in the depths of the 2008 crisis.
Certainly, the tentative attempts of recent years to roll back on tight regulation of big and medium-sized banks are over now.
On the other hand, the rising cost of liquidity and problems in fintech could play into hands of more established and larger banks.
Systemically important
The collapse of SVB is something of a Lehman Brothers moment for fintech, as it had become a systematically important bank for parts of the tech sector. Even in the UK, where SVB had a relatively small local subsidiary, many fintechs saw little other choice for funding.
Its takeover by HSBC will give UK clients some protection from the fallout of the group’s collapse, but it remains to be seen if the HSBC-owned bank will be as open to banking startups as it was before.
As rates have risen, investors have already rotated away from growth stocks such as fintech. There has rarely been a more difficult funding environment in venture capital for a tech sector that has relied heavily on new injections of cheap capital to sustain loss-making growth.
Klarna’s down round in the middle of last year is far from the only sign that the boom in fintech is over. There is a widespread belief that Revolut, which achieved a $33 billion valuation in a funding round in 2021, would struggle to achieve that if it were to try to raise capital today.
The bankruptcy of FTX signalled an end to crypto-market excess. Now Block, formerly known as Square, is subject to an activist short-seller attack.
Sustainable future
The UK Financial Conduct Authority’s recent warning to payments companies to maintain tight controls is a further indication of nervousness, especially after UK embedded finance company Railsr entered into a pre-pack administration process recently.
Perhaps some of these companies will end up owned by bigger banks. Perhaps the next 10 years in banking will see less innovation for innovation’s sake. The focus may move away from fintech towards sustainability.
Much will depend on the political direction in the US, but president Joe Biden’s Inflation Reduction Act is a sea change for green investment, while energy insecurity is also galvanising efforts in this direction in Europe.
Sustainable finance might still be a relatively small part of banking, but it will be seen increasingly as vital to the sector’s future.