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Crypto Volatility Marks Deadweight Disruptors

Crypto Volatility Marks Deadweight Disruptors

If there’s one constant for FinTechs in general, and crypto and buy now, pay later (BNPL) businesses in particular, it’s this: volatility.

For digital-first and digital-only businesses looking to change the way banking is done and commerce is conducted, the regulatory gaze is tightening. Consumer tastes are changing. Inflation is rising, which means it’s more expensive than ever to operate. At the same time, capital markets are drying up and funding is becoming increasingly scarce.

According to Jim McCarthy, president of i2c, for many of these companies – perhaps for all of them – the way they make money today will not necessarily be the way they make money in years to come. (or even months) to come.

Cryptocurrency remains a key example of verticals grappling with pressures that seem to change daily. As McCarthy told Karen Webster, painting the crypto landscape as one marked by a seamless set of services would be a mistake. We are witnessing, in the public and private markets, a flight towards quality which separates the established names from the Celsius Wallets of the world.

“It’s going to be tough,” he said for now, noting that “we’ve seen the numbers from Coinbase.” Monthly users transacting have slipped quarter over quarter, as has the value of crypto holdings on the marquee platform’s balance sheet. But the company’s cash position remains strong (as noted by management).

McCarthy told Webster that pick and shovel games could prove the most viable businesses in this unstable climate. Infrastructure players are the ones who can work with regulators to standardize the rails and work with banks to lay the foundation for crypto, even though digital assets have yet to find a ubiquitous use case…for the moment.

Innovators will thrive, and the handful of companies built around speculative concepts or frenetic trading (hoping values ​​will simply rise) will go the way of the dodo.

“Right now it’s a case of buyer beware,” he said of crypto, which as a payment method is counterintuitive due to the inherent lack of stability. , “and you must know very well that there is no safety net – and you should not expect a safety net.

There remains a critical lesson (particularly for real-time payments) to be learned amid the fragmented and choppy crypto industry, McCarthy said.

And that lesson is that interoperability is key. We are not there yet, but cryptos must act as trusted IOUs between parties and must be able to cross borders without friction in order to settle quickly and transparently. Big tech companies like Facebook have missed an opportunity here, he said.

FinTechs as banks

Volatility is also changing the nature of traditional financial services; FinTechs are entering the territory traditionally held by banks. Along the way, FinTechs look even more like banks. They offer transactional debit cards, for example, and glean interchange revenue, but they need more than that to fund additional services for their account holders (who in turn are fee-resistant).

This is difficult given that venture capitalists are increasingly reluctant to fund these newcomers who want some diversification. Debit exchange rules may also evolve, which may or may not cap revenue streams.

For FinTechs who may have offered free accounts to set up customers, but then had to monetize those accounts, “they have to serve those consumers or lose them; the transactional model is only as good as the people who transact. Even modest fees are still fees.

There is also a fine line to walk here, as cross-selling services and products can cause problems for these companies (traditional banks as well). Traditional banks have an inherent advantage over FinTechs, in that they have built-in compliance and can compete on price in ways that their less well-capitalized FinTech brethren cannot. Banks are particularly well positioned to withstand the downturn in the capital cycle and are less dependent on transactional income than FinTechs.

FinTechs can, however, look into certain trends such as the continued explosion of the BNPL, but not without risk. The BNPL space is also volatile, marked, as McCarthy put it, by too many players and less capital to fund them.

Seismic changes are looming for BNPL, he said, as the CFPB investigates the industry, but the specter of unintended consequences looms, as it is not clear who the agency is seeking to protect. “There is a lack of understanding on how the BNPL model works,” he said of regulators. In fact, PYMNTS’ own research shows that BNPL users are prime and near-prime users who tend to be quite smart with their money.

As these pressures persist, he predicted that we will continue to see roll-ups and acquisitions in the BNPL arena, such as Block’s purchase of Afterpay and banks continuing to enter the game. Today BNPL players ensure they have the right data and data science teams to effectively manage credit risk. Looking ahead, he said, inflation remains firmly entrenched and will only get worse in the coming months as rate hikes continue to make debt more expensive.

But as savvy gamers build their brands and strengthen their footprints across the world, he said, “you’ll always have gamers weathering the storm.”



About: Results from PYMNTS’ new study, “The Super App Shift: How Consumers Want To Save, Shop And Spend In The Connected Economy,” a collaboration with PayPal, analyzed responses from 9,904 consumers in Australia, Germany, UK and USA. and showed strong demand for one super multi-functional app rather than using dozens of individual apps.


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