Future of Investing

The effect of ‘money on the sidelines’ on fintech

  • As interest rates rise, money is increasingly finding its way towards safe, high yielding assets.
  • This is creating a challenge for fintechs predicated on selling or brokering riskier assets.

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The effect of ‘money on the sidelines’ on fintech

Beyond the negative headlines of the precipitous drop in venture capital investments into the sector, fintech has to contend with another confounding dynamic: money on the sidelines.

What's happening: With money market rates above 5 percent (and indications interest rates may still rise higher), retail and institutional investors would rather keep money in the bank than take on any durational risk: cash sitting in US institutional money market accounts now totals almost $5.5 trillion, according to the Investment Company Institute.

An example: Last quarter, fixed-income specialist Franklin saw only $200 million of inflows into its investment products, but that was offset by $7.3 billion in outflows moving specifically into cash.

Money flows to higher, less risky returns: So, fintechs that depend on this money making its way toward riskier assets -- investment platforms, in particular -- may find themselves starved of client cash.

  • Robinhood has seen its core stock trading business slowing down. Crypto trading has seen better days and the firm’s transaction-based revenue declined for the 5th consecutive quarter from $218 million in 2022 to $207 million this year.
  • Coinbase's trading volumes are down pretty significantly, too. If crypto is seen as an alternative asset, many investors have flown to the safety of money markets and deposits, even as bitcoin prices have rebounded.
  • AngelList, an investment platform in startups, is also seeing historically low volumes of investments in startups. Only 6.1% of active startups on AngelList raised a round or exited in 1Q23, the lowest rate ever observed in its dataset.

Fintechs diversifying to get deposits: For the most part, firms that can arbitrage higher savings rates like SoFI are benefiting from this reach for yield in deposits. Total deposits for SoFi grew by $2.7 billion to reach $12.7 billion by the end of the last quarter, with 90% of deposits from direct-deposit members. The fintech bank added more than 584,000 new members during its second quarter.

An increasing number of fintechs and embedded brands are competing for their share of deposits, too. Apple's savings accounts offers over 4% APR and neobank Upgrade offers 4.56% for customers with a minimum balance of $1,000. For its part, Robinhood offers 4.65% APY on its Gold accounts, as part of a $5-a-month subscription that also includes lower borrowing costs for margin investing and research for stock investing.

Things eventually come around: But cycles don't last forever and this money in cash on the sidelines will eventually make its way back into riskier assets like stocks. “It’s a moment in time,” Rob Sharps, chief executive of the $1.4 trillion manager T Rowe Price said in an interview with the Financial Times.

“It may last for a while. But it isn’t going to last for ever. Ultimately, people will need to seek higher returns than what they’re likely to get in money market funds over time.”

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