Halloween special: What fintechs fear lurking ahead

What we’ve been thinking: With fintech adoption at an all-time high, startups have a lot to be optimistic about. Yet this wider reach also brings greater responsibilities and challenges. With Halloween just around the corner, it’s a good time to reflect on market trends that fintechs may find “spooky.”

The SEC stalks robos and digital brokers.

• Just in time for some light Halloween reading, the SEC recently teased where it will focus regulatory efforts next year.
• Wealthtechs could have their compliance work cut out: Chair Gary Gensler has raised concerns over conflict of interest and data bias risks that may arise when robo advisors use predictive data analytics and other digital engagement practices.
• The regulator also published its meme stock report, which identified four areas of market structure that warrant consideration for changes, including the payment-for-order-flow model.

Tether’s big crash risk haunts the crypto market.

• The largest stablecoin globally was fined $42.5 million this month for lack of transparency over its reserves. Rather than being fully backed by US dollars, Tether is partially backed by other assets, such as debt securities and bonds, which are less liquid than cash.
• What’s troubling is that a large share of crypto trading is done using Tether rather than fiat money—meaning stablecoin holders could crash its value with a mass redemption and bring down the entire crypto market.
• This could significantly impact digital brokers’ revenue, which is increasingly reliant on crypto trading. Robinhood Q3 earnings already have taken a big hit from a crypto trading slowdown.

Small insurtechs look on as established players devour much of the funding.

• Just 15 insurtechs raised $3.3 billion, or two-thirds of total global funding in Q2. This week, Willis Towers Watson (WTS) released Q3 funding volumes in which 11 insurtechs still accounted for 51% of the total.
• With continuous access to deep capital pools, established insurtechs can keep funding their rapid growth, grabbing ever-larger market share and calling into question younger startups’ longevity.
• In 2020, WTS estimated that 184 insurtechs globally were close to or had shut down since 2010. It now puts this number at 456.

Neobanks fear that the worm has turned.

• Mainstream banks are hitting back at the potent threat of neobanks by adopting the digital best practices that the challengers first championed, per The US Digital-Only Banking Revolution report.
• To the detriment of neobanks, this includes partnering with third-party vendors and making strategic acquisitions to increase their digital account holder volumes.
• There's now uncertainty “whether digital-first banks can go mainstream before mainstream banks go digital-first,” per Vice President of Content and Head of Financial Services at Insider Intelligence Daniel Van Dyke.

BNPL defaults lurk in the shadows.

• Consumers increasingly use buy now, pay later (BNPL) services in addition to credit cards. In fact, 44% of those who recently used BNPL prefer it when making purchases. The services are particularly popular among consumers in lower-income brackets.
• However, there are warning signs BNPL could be the next source of unsustainable consumer debt as more than half in the US and 40% in the UK have missed a payment. “A lot of BNPL don’t have to report to credit rating agencies so they may not know how many loans have been offered and this opens the door to consumers cross shopping loans to a degree that overextends them,” per Insider Intelligence Principal Analyst David Morris.
• As a result, BNPL providers will likely face increasing regulatory oversight in the near term: The UK’s Financial Conduct Authority announced in February that it would regulate these products.