Merge Or Perish: Why Billion-Dollar Fintech Companies Are Suddenly Facing A Bleak Future | Forbes

fintech startups are really exciting because they're innovating in the finance space which is typically a little bit slower moving so they're bringing things like new features like early wage access that plus like an easier user experience was just really exciting for people so what caused fintech to get so much attention and excitement initially is there's a lot of potential you know when you think about meeting customers where they are delivering banking services more cheaply and efficiently there's really a lot of opportunities to to give better services to people and for much cheaper and so that combined with covid a surge in online transactions people not wanting to go to a bank in person really created a lot of Tailwinds behind fintech and a ton of interest in investing there are a bunch of companies getting attention during the past few years stripe is a is a big one they're a payments giant who makes who make payments a lot easier and they were valued at 95 billion dollars in 2021 chime is a digital bank that was valued at 25 billion dollars buy now pay later was a really big category so companies like a firm and karna got a ton of attention really high valuations during covet especially there was a view that this was going to change banking completely and they spent a ton of money on marketing to bring in a lot of users but the valuations that they were getting end up not being justifiable when you look at the revenue they're bringing in and so real Innovation here really valuable service but the business models haven't been as productive and bringing enough Revenue to support the valuations that they really received so Jeff and I started out with a really long list that we pulled from CBN sites and pitchbook of companies that hadn't raised in a long time I think our Benchmark was about 18 months and then as we were researching those companies we kind of learned about a lot of other ones through interviews with experts and analysts and speaking with people at the companies a really common theme we saw among the companies was that they raised money and then they expanded really quickly so they hired a lot of people they opened new offices and then as kind of macro conditions changed they weren't able to upkeep that burn rate and so they had to let people go they had to close down offices or products Neo banks are digital first banks that don't have any branch locations they deliver all their services through online channels apps websites and they're new you know Neo banks are essentially in the UK and in Europe they call them Challenger Banks but they're newer Banks who are trying to disrupt this traditional brick and mortar Bank model now for digital Banks one of the challenges is the business model they don't have banking Charters which is what allows you to lend cut to companies and to do it very profitably historically lending has been really banking's best business models how they make the most money and if you don't have a banking Charter it makes it a lot harder to do it profitably another big issue is Banks actually serve customers fairly well when you especially when you think about more affluent customers and especially in the US and people don't have a ton of complaints we're more affluent and use traditional Banks and so where Neo Banks really thrived was middle and lower income customers and they did a great job of and have done a great job of serving these customers well lower fees easier access to Services the challenges with goer and medical income customers they don't have this much money they don't you can't make as much money off of them unfortunately and so it becomes harder for these Neo Banks to actually make a lot of money off them they're harder to lend to varro is one of the companies that stands out for having Financial issues right now they had an interesting model where they went out and spent 100 million dollars on a bank Charter and it took them years the challenge they're having is they haven't been able to attract enough deposits to really lend profitably and so you know they have a base of 5 million customers five million accounts that they've reported only 275 million dollars in deposit so only 52 dollars per account and so it's really hard for them to make money on Lending I think Venture Capital people are still very excited about fintech but it's more just about seeing what the public markets do and kind of where that bottom is before they start putting more money in the industry is going to be fine basically what happened here is kind of classic Tech bubble just like we saw in the com bubble and a boom and bust what happened was you had a lot of innovation long-term opportunities that people were pursuing and then a lot of investment flooded in and too many investors were bidding on the same companies at the same time and so companies that then had Half Baked business models got funded pretty easily and there was too much money chasing too few really good companies and so what you had was just a big bubble and now what's happening essentially is kind of the aftermath and the downside of the bubble where you have a lot of companies that need to do layoffs a lot of companies that need to really lower their costs so they can get closer to profitability and what we will see is you know a number of companies as we talked about in our article shutting down a number of companies getting a required and but the industry will be fine and the strongest companies will ride this out and and they'll some of them maybe even able to gain market share during this tough kind of bear market for fintech

Channel: Forbes

Views: 24,589

Keywords: Forbes, Forbes Media, Forbes Magazine, Forbes Digital, Business, Finance, Entrepreneurship, Technology, Investing, Personal Finance, fintech, mobile payment, online banking, stripe, affirm, buy now pay later, jeff kauflin, emily mason, billion dollar, billions, billion dollar companies, billion dollar valuations, fintech valuations, fintech crash, scandal, money, debt, sink, devalued, crash, fintech news, money news, banks

Id: TF-GSW4FHEk

Length: 5min 58sec (358 seconds)

Published: Fri Feb 24 2023