(Forbes) -- The partial government shutdown, which is now in its second month, is having an impact on the fintech industry whether it's from a regulatory standpoint or customer perspective.
While the stock market has been holding up in the face of what is now the longest shutdown of the Federal government in modern history, fintech startups looking to go public via an initial public offering or those needing a sign-off from regulators are seeing efforts delayed. The irony isn’t lost on some of the fintech startups that decided to go the regulated route, eschewing the launch of services without the approval of the federal government. Those who play by the rules are now the ones hostage to a government that is not operating.
“It's interesting to see the SEC (Securities and Exchange Commission) come to a screeching halt,” said Max Niederste-Ostholt, co-founder and Chief Financial Officer at Rally Rd, the New York alternative investment marketplace operator.
“On a normal day, the SEC is churning out incredible work and keeping the financial system operating. When something like this happens literally some of the biggest companies in the country’s businesses are coming to a halt.”
Rally Rd, which enables anyone to invest in luxury cars via an IPO of the vehicles, relies on the Securities and Exchange Commission to sign off on its offerings. If the government shutdown continues much longer, the backlog the SEC already approved may start to run out. Rally Rd is also interested in expanding into other markets including memorabilia and wine and whiskey. Without the blessing of the SEC it can’t move forward.
“The government has made all these regulations easier for startups and almost in a flip of the switch the process has stopped,” said Niederste-Ostholt. “We were prudent. We got a lot of stuff in early. But if the shutdown continues for months this will certainly have an impact.”
Lawmakers are scheduled to vote on dueling proposals Thursday (January 24) but optimism is low that it will result in the reopening of the government. It could spark a fresh round of negotiations, something that hasn’t happened in the past few days as politicians on both sides continue to squabble.
IPOs, Online Lending to be Impacted by Shutdown
The alternative asset startup market isn’t the only area of fintech impacted by the shutdown. With the federal government playing a bigger role in the overall financial technology industry, the lack of government workers is hurting everything from how much a fintech can raise to when a business plan is approved. One of the most visible impacts of that is the pending IPOs of fintechs, software startups and consumer-focused companies. Take Lyft and Uber as one example. The two ride-hailing startups are expected to go public this year. Most IPOs tend to happen in the first half of the year before the summer slowdown and the holiday season sets in. But with the government closed the SEC can’t approve IPOs. That could result in a huge backlog when it does reopen. “Those companies that need public market liquidity to fund operating expenses will have a much harder time,” said Niederste-Ostholt, noting that if the SEC opened up tomorrow there would be a two to three-month delay in approving IPOs. “Anything that was supposed to get done in the first half of the year now will get done no earlier than the second half of the year.”
Outside of IPOs, online lenders are being hurt by the shutdown since the SEC has to sign off on their ability to sell loans to investors. Without that blessing, they may be forced to turn to other avenues to secure funding. These online lenders are also the source of funds for government workers who are about to miss two paychecks. If they can’t get access to capital they could turn to pawn shops and payday lenders. It’s the reason stocks of the two industries have been on an upswing since the shutdown began 33 days ago.
For some fintechs, the government shutdown isn’t all bad news. It gives the established players an edge over competitors awaiting regulatory approval. It also validates the business models and missions of others. Betterment, the New York online investment company, is an example of the latter. Adam Grealish, director of Investing at Betterment said there was a “notable uptick” in customers who are tapping their safety net accounts to cover bills as the government remains shuttered.
Betterment, a big advocate of setting aside money for the unexpected, enables customers to place their savings in different digital buckets and input journal entries noting why they are taking an action. “On the one hand it's heart wrenching the hardships government workers are encountering,” said Grealish. “On the other hand, it's great to see these customers have taken steps ahead of time to plan for any unforeseen event.”
