The collapse of Silicon Valley Bank (SVB) and Signature Bank, followed swiftly by the emergency rescue of Credit Suisse, has exposed fissures in the banking sector. These shock events ignited fears of a fresh banking crisis and reminded onlookers that it’s impossible to predict what’s around the corner.
In the fintech space, London-based embedded banking platform Railsr has just been saved from collapse with an emergency takeover by a group of investors. Some fintechs are now struggling with cashflow after growing too quickly during the pandemic. In the ecommerce space, there’s a similar story.
The Covid crisis caused surging growth in ecommerce from a 16% to a 19% share of all retail sales in 2020, according to the UN. Innovation in digital payments accelerated as consumer behaviour shifted almost overnight. In a bid to capitalise on this boom period, many businesses took on commitments which proved unsustainable, such as increased financing or adding to their headcount. Many of the companies which benefited from this trend expected it to continue.
But marketplaces have been telling us that sales volumes have been reducing over the last year. Higher inflation and a recessionary environment in some economies has caused consumers to put the brakes on their discretionary spending. This is where we see the twin stories of ecommerce and financial services cross paths.
As ecommerce businesses adapt in the face of these pressures, the financial services companies that serve them must become leaner too.
We have been tracking layoffs and devaluations in the ecommerce sector and have seen numerous firms cutting jobs, freezing recruitment or experiencing falling valuations. For example, Tiger Global-backed $2bn marketplace startup Ankorstore is set to become the latest tech unicorn to cut jobs totalling half its workforce, according to reports, while at the end of last year, Irish payment processing platform Stripe laid off 1,100 employees, or 14% of its staff. Fintechs that now need external funding are struggling to get it, as fintech funding slumped by almost half in 2022.
The result for the ecommerce businesses that use these financial services is that they too can’t access the finance they need. Fintech lending supply dried up during the Covid crisis as lenders became financially constrained and lost their ability to fund new loans. The last 12 to 18 months have seen a major contraction in credit availability for businesses, with more to come. EY predicts that bank to business lending will contract 3.8% this year, one of the sharpest falls in a decade.
At Storfund, we didn’t take venture capital funding during this high-growth period so we are not now contracting like many of our competitors. Where many finance providers to ecommerce sellers are becoming more risk averse, reducing lending and increasing the cost of capital, we have been able to maintain a consistent offering to our clients.
Ecommerce is a young niche, and not all entrepreneurs within it will have been through a full business cycle before, so some are having to adapt to this tougher backdrop as they go. At a time when sellers are grappling with inflation and wondering how they can pass on these costs to their customers, it’s never been more important for them to have reliable cash flow and affordable financing options.
Looking forward to the next 12 months and longer term, we can see a few key trends emerging in the ecommerce financial services landscape.
What’s available: Lower credit/higher fees
Working capital will continue to be more difficult to access; lower credit lines, decreased loan amounts and higher fees will all be a feature of 2023. A survey by the National Federation of Self Employed and Small Businesses (FSB) found 51% of small businesses rated the overall availability and affordability of new credit as poor in Q4 2022.
As regulators and policymakers examine the fallout from the collapse of SVB, risk management and compliance will be firmly in the spotlight. This scrutiny could lead to regulatory changes down the line as authorities look to reduce systemic risk in the banking sector, which may have an impact on institutions’ ability to lend.
Who can access it: More robust underwriting
Fintechs are seeking to protect themselves with more robust underwriting. For example, personal guarantees are becoming the standard as a way to reduce lending risk. However, this puts an entrepreneur’s personal finances on the line as collateral for business borrowing.
Where financing is available: Embedded finance
We expect to see embedded finance, where financial services such as lending and payments are integrated into non-financial businesses, including marketplaces, gain further momentum. Financial services embedded into ecommerce or other software platforms accounted for $2.6 trillion, or nearly 5% of total US financial transactions in 2021, and will exceed $7 trillion by 2026, according to Bain & Co. As well as payments and lending, insurance, tax and accounting services will also become increasingly available.
To find out more about how Storfund can help you maintain cash flow in your business in a changing landscape, contact us today.
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