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 Bank.
The Columbus, Ohio-based lender and its in-house venture capital arm, Huntington Corporate Ventures, are seeing “a fairly notable acceleration in venture capital activity in the fintech space, which we view as a good thing,” Wasserman said in an interview following the bank’s third-quarter earnings release. .
“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
Fintechs have seen explosive growth over the past decade. But the COVID-19 pandemic, 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 study by McKinsey & Co. Fintech financing fell 40% from a year over year in 2022, going from $92 billion to $55 billion, 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.
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 the decline 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 few 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. In addition to the increase in the number of opportunities in the sector, “the focus on fintechs that provide services to large enterprises really seems to be intensifying, as opposed to fintechs that try to build relationships with end customers” . ” Wasserman said.
This includes companies “creating new payment services that banks can provide, or scaling capabilities for insurtechs,” he said.
AI has also influenced the current direction of fintech, 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, Huntington is also closely monitoring the potential impact of changing interest rates on its core business as it targets continued growth. Even though the Fed cut rates last month, it is unlikely to make a change. second half cut point cut off at their next meeting. 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 company.
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 increase in total loan balances during the quarter was mainly due to a 7%, or $837 million, increase in consumer auto loans, according to its results. 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.