Major fintech players in the US attracted nearly$7.5 billion in venture capital funding across 194 transactions in the second quarter that ended June 30, 2021. This was up nearly 70% from the same period last year, according to S&P Global Market Intelligence's 2022 Banking Industry Outlook released Monday. 

The report said that consumer-facing fintech firms that started in specific areas -- such as mobile payments, digital lending, or investment management -- have steadily expanded their product suites, adding product lines and features aimed at further entrenching customers to grow market share and improve profitability. 

Companies operating in the payments sector drew in the most capital. Heightened digital adoption has led to strong fundraising among fintechs in other parts of the world, too. Privately held fintechs based in the Asia-Pacific region, for example, were on pace to exceed pre-pandemic fundraising in the first half of 2021; they raised$5.6 billion, more than double during the same period last year, according to the report.

S&P found that pandemic-driven lockdowns actually accelerated digital finance adoption, and several fintech companies expedited their own expansion plans. Payment providers, such as PayPal and Square's Cash App, saw major spikes in new users early in the pandemic, as customers shifted toward digital channels to handle transactions and obtain stimulus payments. Mobile payment platforms built on the momentum by adding nonpayment services like direct deposit or stock trading, in hopes of transforming themselves more rapidly into mobile financial hubs. The goal is to increase user engagement, especially into higher-margin products and services, the report said.

Consumer engagement drives revenue, as mobile payment platforms collect fees on transactions; it's also an indicator of how much consumers value the app. The hope is that if consumers see utility in the wider array of products and services, such as PayPal's upcoming high-yield savings account, consumers will store larger amounts of money within the platforms for longer, the S&P report found.

Larger account balances should boost profitability by driving greater engagement with the platforms' expanding suites of payment and banking products while lowering the cost of facilitating transactions for payment providers. Transactions that draw on stored funds are generally cheaper to facilitate than transactions backed by credit and debit cards.

S&P summed up that the push by some of the major fintechs to build omnichannel payment platforms, provide more banking services, and upgrade apps to rebrand them as mobile financial hubs should augment the perceived value of these apps and support engagement. Ultimately, these efforts should put fintechs more firmly in competition with traditional banks.

The S&P report also said that trillions of dollars in government relief efforts led to historic deposit growth at U.S. banks during the pandemic, while loan growth remained weak, resulting in an estimated$3.7 billion in excess liquidity to build on bank balance sheets as of June 30. Excess funds are expected to remain above$2.9 trillion through 2023, even as the economic recovery continues.

As a result of a tough earnings environment and changing competitive landscape, S&P notes that some banks are modernizing their offerings, while others are pursuing mergers in the face of daunting challenges. M&A allows institutions to right-size their costly branch networks, while making necessary technology investments that enable more effective competition with fintechs, .

"Emergency relief efforts during the pandemic moved credit risk off the table but have directly contributed to margin pressure at U.S. banks," said Nathan Stovall, principal research analyst at S&P Global Market Intelligence. "Banks have been forced to adjust to customers shifting business to digital channels as well as new competition from fintech and big tech firms. This has put a premium on achieving scale to invest in technology, become more efficient, and compete more effectively, prompting a greater number of banks to look at deals."

Tech Earnings

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• Adobe shares sag as outlook misses expectations
• Micron stock jumps as fiscal Q2 results, outlook top expectations
• Oracle shares rebound, fiscal Q4 view tops expectations
• PagerDuty stock surges as fiscal Q4 revenue, forecast top expectations
• DocuSign shares plunge, Q1 and year views miss expectations
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