Financial technology companies are licking their wounds.. they lost half a trillion dollars

Nearly half a trillion dollars has been wiped from the valuations of fintech companies that until recently soared and benefited from a surge in initial public offerings at the start of the pandemic.
More than 30 fintech companies have listed in the United States since the start of 2020, according to data from CB Insights, as investors have embraced companies they believe can benefit from a long-term shift to digitization that the pandemic has accelerated.
But concerns about high interest rates, lack of profits and untested business models, as well as the economy heading into a possible recession, have put these companies on the cusp of a massive stock market selloff this year.
According to “Financial Times” analysis, shares in the recently listed financial technology companies have recorded an average decline of more than 50 percent since the beginning of this year, compared with a 29 percent decline in the Nasdaq Composite Index. Their combined market capitalization decreased by $156 billion in 2022. If each stock is measured from its all-time high, the total loss is $460 billion.
This year’s second quarter update, presented last week by online lender Appstart, shows the challenges facing many fintech companies. Upstart, which says it uses artificial intelligence to make decisions about consumer loans, blamed a “turbulent economy” for slowing revenue growth and mounting losses.
The losses are compounded by unusually strong results from the same quarter last year, when economic stagnation in 2020 led to annual revenue growth of more than 1,000 percent.
Pressure has also hit more established companies such as PayPal and Block – formerly known as Square – which together lost about $300 billion in market value this year.
The decline in valuations was not limited to the public market, but also shifted to private companies. Clana cut its price from $46 billion to less than $7 billion in a private financing round earlier this month. The Wall Street Journal reported this week that Stripe cut its internal valuation by more than a quarter.
Dan Dolev, an analyst at Mizuho, ​​said that fintech companies – especially digital payments companies – “are the first part of the tech sector to benefit greatly from Covid because everyone was stuck at home, which prompted them to for sale online.” He added, “Now it is witnessing an excessive correction to the downside, ahead of other sectors as well.”
But Dolev expects many companies to recover in the second half, citing that the results of year-on-year comparisons are now better.
Some companies also face additional pressure from regulators. In this regard, the Securities and Exchange Commission is conducting a review of a perceived conflict of interest arising from “pay for order flow”, the main source of income for the online broker Robinhood. Gary Gensler, the chairman of the Securities and Exchange Commission, called for clearer oversight of the cryptocurrency markets. For its part, the Consumer Financial Protection Bureau last December launched an investigation into companies based on the “buy now, pay later” system.
The results of companies providing traditional financial services were also affected. Last week, Wells Fargo attributed the $576 million write-down in its investment portfolio to a failure to meet analysts’ expectations for returns. Wells Fargo Strategic Capital was one of the largest investors in fintech last year, according to CB Insights.
Despite this series of challenges, many investors continue to support the sector. Cathy Wood’s ARK Fintech Innovation EFT is down 62 percent this year, one of the most sought-after sector funds, and net outflows were less than $90 million, down from $2.7 billion of inflows over the past two years. After a sharp decline earlier in the year, investors have added $31 million net since the start of June.
“It is likely that a number of these companies will continue to experience pressure until the end of 2022 – higher interest rates will create challenges for companies on the lending side and on the ‘buy now, pay later’ companies in particular.
He added, “Despite the increased risks in the market, net outflows have so far only decreased by about $40 million since the beginning of the year (…) This shows that long-term investors still have a lot of faith in this sector.”

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