The Fed cut rates 50 basis points. What now for banks and fintechs?

The Federal Reserve's recent decision to initiate its rate-cutting cycle with a 50 basis point reduction has significant implications for the banking industry — particularly community banks — and fintech companies selling into this space. Rate reductions tend to ripple through the financial system in predictable and complex ways, and understanding how these changes affect banks and fintechs is crucial for anticipating future market behavior..[For the sake of this article, I will avoid opining on the merits of a 50 basis point cut versus an alternative 25 basis point cut .. there is more than enough conjecture on the topic out there already].The role of banks in maturity transformation.At the heart of a bank's business model is maturity transformation — the process of turning short-term liabilities (deposits) into longer-term assets (loans). Banks earn the spread between what they pay depositors and what they earn on their loans. This spread in yield, or net interest margin (NIM), is a key metric for measuring a bank's profitability. In times of higher rates, the margin between short-duration deposits and long-duration loans tends to widen, boosting banks' profitability..However, when the Fed lowers rates, banks are faced with a new opportunity: They can reduce the interest they pay on deposits while maintaining higher yields on existing loans, thus improving their NIM. The 50 basis point cut is expected to further support this, as banks can adjust their deposit rates faster than loan rates, enhancing profitability..As you can see below, the most recent rate increasing cycle brought the Fed Funds target to near 20-year highs..How Rate Movements Affect NIM.Historically, rate cuts like the one just announced are viewed as a positive force for a bank's NIM. This dynamic is driven largely by deposit betas — a measure of how sensitive deposit interest rates are to movements in market interest rates. As you can see in the below chart, the cost of deposits is highly correlated with the Fed Funds rate, albeit at different levels of materiality..Fundamentally, rate movements tend to work their way through the liability side of a bank's balance sheet faster than they do the asset side. Thus, a rate reduction cycle is expected to lead to a near-term widening of NIM as the interest paid on deposits resets lower and faster than the repricing of longer-term fixed loans..With a higher NIM, community banks are likely to expand their loan portfolios, lending more aggressively in response to cheaper funding costs. For smaller community banks, this could be a strategic moment to grow, deploying capital at higher returns while benefiting from a lower cost of funding..It's important to put this into the context of the economic forces underpinning this decisions in the first place — with a slowing economy (as indicated by the labor market), rate cuts are meant to spur economic activity by making it cheaper for consumers and businesses to borrow money. [Note that this is a gross oversimplification of how banks manage interest rate risk and how rate shifts work their way through a bank balance sheet — but for the sake of brevity, this level of analysis should get the point across]..What rate reductions mean for fintechs selling to banks.For fintechs that sell into community banks, this shift in interest rates comes with both risks and opportunities. Many fintechs have built products and services that thrive in specific rate environments. For instance, companies providing loan origination platforms or deposit management tools have benefited from the rate environment over the past few years. .However, startups whose value propositions hinge on specific interest rate conditions need to be acutely aware of the risk that such macroeconomic shifts pose. The Fed's control over interest rates creates an external factor that fintechs — especially those in the credit space — cannot manage. This unpredictability is why VCs are often wary of businesses whose success is tied to interest rate fluctuations..This is where understanding the risks you can and cannot control becomes crucial. Startups need to be keenly aware of external factors — like interest rates — that can make or break their business models. It's one of the reasons why venture capitalists are often cautious about investing in credit businesses, where success can hinge on broader economic conditions shaped by decisions at the Federal Reserve. These types of businesses are subject to forces they cannot influence, making them inherently riskier..That said, timing is everything. For fintechs that have spent years developing solutions that enable banks to deploy capital more efficiently, this rate cut could be a golden opportunity. As banks look to expand their loan portfolios, fintechs offering technologies that streamline underwriting, automate loan processing, or enhance risk management could see accelerated growth. Banks will be seeking out tools that help them operate more profitably in a lower-rate environment, and fintechs that meet this demand are well-positioned for success..Closing thoughts.At BankTech Ventures, we are laser-focused on identifying fintech solutions that help our banks grow more efficiently and effectively. As the rate environment shifts, we believe the next wave of bank technology adoption is upon us. Fintechs that can help community banks navigate this new landscape, deploy capital wisely, and optimize operations will thrive..If you're an early-stage company selling into financial institutions and believe you have the tools to make an impact, we'd love to hear from you. Let's work together to build the future of community banking..Jake Fuchs works on the BankVentures investment team, based out of New York City. Fuchs helped launch Primetime Partners, a $50 million venture fund that invests in products, services, and experiences that cater to the older adult demographic (ranging from fintech to proptech to digital health).