Regional bank sell-off ensnares more fintech business partners

The regional bank sell-off intensified Thursday as share prices for Pacific Western Bank and Western Alliance fell sharply. Tennessee-based bank First Horizon was also hit after a proposed merger with TD Bank was called off.  

For fintech startups that partner with regional banks, the day's events sent yet another shockwave through the industry. From the earliest days of the crisis, the banks providing savings and loans services to so-called neobanks have been under pressure from shareholders and depositors.  

Shares of Los Angeles-based PacWest dropped more than 50% Thursday afternoon, and Phoenix-based Western Alliance's stock dropped over 35%, adding to losses that followed Monday's collapse and sale of First Republic Bank to JP Morgan Chase. Since then, the stocks of both banks have slumped more than 60%.  

PacWest said in a statement that "the company will continue to evaluate all options to maximize shareholder value." Western Alliance denied reports that it was looking to sell itself, in a statement to PitchBook.  

Both banks have partnerships with several fintech startups, and recent events have exposed potential risks for startups contingent on the financial health of their partners. Western Alliance had most recently partnered with Tassat, a blockchain payments provider, to allow its customers access to Tassat's network. PacWest had partnered in April with Unit, a startup offering financial services to other fintech companies.

Amber Fehrenbacher, marketing director at Tillful, a startup that offers small businesses secured lines of credit, said the crisis has altered the company's expansion plans and product offerings. Tillful is partnered with Sutton Bank, another regional bank.  

"We're trying to keep our heads on straight and focus on the job in front of us," she said. Tillful recently called off plans to launch an unsecured credit card after months of preparation.  

"It just didn't make sense to take on that debt and risk now," Fehrenbacher said.    

PitchBook senior analyst James Ulan said the plight of regional banks puts a hold on the efforts of fintech startups to expand their offerings.  

"Neobanks are largely one-trick ponies that mostly offer debt accounts with a few bells and whistles," Ulan said. "It's hard to expand and build when you only have one thing to offer."  

The crisis, he said, could strengthen some partnerships and harm others.

Some investors are worried that the situation, outside of hampering partnerships, could lead to consolidation that would be unfavorable to fintech startups, making the banking system more difficult to navigate and relationships harder to cultivate.  

Dusty Wunderlich, CEO of buy now, pay later startup Credova, said fostering relationships with smaller banks is key for a fintech's success—and that the crisis and potential banking consolidation presents a mixed bag for venture capitalists.

"The banking system is at the heart of the fintech ecosystem," Wunderlich said.  

He explained that consolidation could mean that it would be easier for fintech startups to get acquired, but it also could make it harder for these companies to navigate and establish partnerships.

"It's all a double-edged sword."

Featured image by JHVEPhoto/Shutterstock

This article originally appeared on PitchBook News