Declining interest rates and continued attention to new technologies such as artificial intelligence have led to an increase in the number of potential fintech opportunities, said Zachary Wasserman, chief financial officer of Huntington Bancshares.
The Columbus, Ohio-based bank and its in-house venture capital arm, Huntington Corporate Ventures, are seeing “a fairly notable acceleration in fintech venture capital activity, which we view as a good thing,” Wasserman said in an interview following the bank’s third-quarter earnings release Thursday. .
“In our view, there are a lot more partnership opportunities here than competitive threats, and so it’s quite healthy and positive that many fintech companies see pretty good business prospects,” he said. declared.
Rekindle the spark of fintech
While fintechs have seen explosive growth over the past decade, the COVID-19 pandemic, a turbulent macroeconomic environment and changing attitudes toward risk have led to a decline in financing and IPOs of these companies in recent years, according to a recent study by McKinsey & Company. In 2022, amid an overall decline in venture capital funding globally, fintech funding fell 40% year-over-year, from $92 billion to $55 billion. dollars, according to McKinsey.
With interest rates at historic highs, fintechs were reluctant to raise capital, and the overall market outlook was uncertain – a trend that began to ease as rates began to fall, said Wasserman. The Federal Reserve cut interest rates by half a point in September, with policymakers keeping a close eye on inflationary headwinds as they mull potential future cuts, CFO Dive previously reported.
There was “a huge amount of dry powder on the margins of venture funds,” Wasserman said. “Activity was quite low. I think we’ve hit bottom and we’re starting to see some sort of pick-up in financing activity as interest rates have started to come down.
Despite its drop in funding, fintech still accounted for about 12% of total venture capital funding over a five-year period ending in 2022, McKinsey said – noting that annual fintech revenues could increase by 15% over the next five years. next five years, compared to 6%. jump expected for traditional banks over this same period.
However, the growth and direction of fintechs will be different in the next five years compared to the last five years. Besides the increase in the number of opportunities in the sector, another major trend observed by Huntington is that “the focus on fintechs that provide services to large enterprises seems to be really intensifying, as opposed to fintechs that provide services to large businesses. I’m trying to build relationships with end customers,” Wasserman said.
For example, the bank sees a number of opportunities involving companies “creating new payment services that banks can provide, or scaling capabilities for insurtechs,” he said.
The AI craze has also influenced current fintech directions, with companies looking to apply the technology to everything from the back office to customer-facing processes in financial services, Wasserman said.
Stay Close to Rate Changes
Outside of venture capital opportunities, Huntingon is also closely monitoring the potential impact of changing interest rates on its core business as it targets continued growth. Even though the Federal Reserve cut rates in September, it is unlikely that it will second consecutive half point cut during their next meeting, CFO Dive previously reported. Many instead expect a reduction of a quarter of a percentage point, according to data from the FedWatch tool.
There is “no substitute for staying very, very close to those rates and being prepared to adjust plans in due time,” Wasserman said of how interest rates might continue. to have an impact on the bank and the economy as a whole for the rest of the year. For example, Huntington reviews “filings, pricing and strategy every week,” he said, especially in the face of the dynamic macroeconomic environment that has taken shape over the past several years.
The scrutiny comes as Huntington saw “the rate of loan growth double” in the third quarter compared to the second quarter, Wasserman said. For the quarter ended September 30, average total loans and rentals grew $1.1 billion to $124.5 billion, a 1% jump from the previous quarter and a 3% year-over-year increase, according to the company’s earnings release. the society.
The bank is seeing “record levels” of loan production in its regional banking segment, which focuses on middle-market banks, small businesses and small businesses locally, Wasserman said. Huntington also continued to see strong growth in its consumer auto lending segment, he said, despite challenges impacting the broader space.
The quarter’s increase in total loan balances was primarily driven by a 7%, or $837 million, increase in consumer auto loans, its results showed. Commercial and industrial loans also increased 6% for the quarter, although Huntington saw a 9% or $1.2 billion decrease in its average commercial real estate loans.