In recent years, working for, or banking with, a traditional financial institution was decidedly uncool. Far cooler was working for or banking with one of the many fintech startups that seemed to thumb their nose at stodgy bank brands.
Then the Federal Reserve hiked interest rates, stocks tanked, and a lot of fintech outfits that appeared to be doing well began looking far less hardy and hale. The question begged now is whether fintech as a theme has lost its mojo.
According to VCs Mercedes Bent of Lightspeed Venture Partners, Victoria Treyger of Felicis, and Jillian Williams of Cowboy Ventures, the answer is resoundingly “no.” In a panel discussion hosted by this editor late last week in San Francisco, however, the investors didn’t sugarcoat things. Led by moderator Reed Albergotti — technology editor of the news platform Semafor — all three acknowledged a variety of challenges in the industry right now, even as they outlined opportunities.
On the challenges front, startups and their backers clearly got ahead of themselves during the pandemic, Albergotti suggested, observing that fintech was “going gangbusters” when “everyone was working from home” and “using lending apps and payment apps” but that times have turned “tough” as Covid has faded into the background.
“SoFi is down,” he said. “PayPal is down.” He brought up Frank, the college financial aid platform that was acquired by JPMorgan in the fall of 2021 by blatantly lying to the financial services giant about its user base. Said Albergotti, “They don’t really have 4 million customers.”
Williams agreed, but said there are positives and negatives for fintechs right now. On the positive side, she said, “from a consumer standpoint, it’s still rather early days” for fintech startups. She said that “demand and desire from the consumer” still exists for new and better alternatives to traditional financial institutions based on available data.
More problematic, said Williams, is “that a lot of these companies have to fix their business models, and a lot of the ones that went public probably should not have. A lot of the usage is still there, but some of the fundamentals need to be shifted.” (Many outfits, for example, spent too heavily on marketing, or right now face rising delinquency costs, having used comparatively loose underwriting standards compared with some of their traditional counterparts.)
Further, Williams added, “The banks are not dumb. I do think they have awakened and continue to wake up to things they can do better.”
Treyger also voiced concerns. “Certain sectors of financial services are going to have a brutal year ahead,” she said, “and in particular lending. We will see very large losses coming through in lending . . . because unfortunately, it’s like a triple whammy: consumers lose their jobs, interest rates [rise] and the cost of capital is higher.”
It’s a challenge for a lot of players, including bigger outfits, Treyger said, noting that “even the big banks announced that they are doubling their loan loss reserves.” Still, she said, it could prove worse for young fintechs, many of which have “have not managed through a downturn — they started lending in the last six years or so” and which is where she expects to “see the most casualties.”
Bent, who leads a lot of Lightspeed’s Latin America investments and is on the boards of two Mexico-based fintechs, seemed the most sanguine of the group, suggesting that while U.S. fintechs may be facing serious headwinds, fintech outfits outside the U.S. are continuing to perform well, perhaps because there were fewer alternatives to begin with.
It “just depends which country you’re in,” said Bent, noting that the U.S. has “one of the highest adoptions of fintech and wealth management services, whereas in Asia, they are actually much higher in lending and their consumer fintech services.”
Either way, it’s not all doom and gloom, said all three. Treyger recounted, for example, that before becoming a VC, when she was part of the founding team at since-acquired SMB lender Kabbage. There, “once a month, we would meet with the new innovation arm that has just been formed by bank XYZ,” she said with a laugh. “And they would want to learn how you get ideas and how to drive innovation.”
What “happens in a downturn is CEOs and CFOs cut back on the areas that are not critical,” Treyger continued, “and I think what’s going to happen, is that all of these innovation arms are going to be cut.”
When they are, she said, it will create “significant opportunity for fintechs that are building products that basically add to the bottom line.” CFOs, after all, are “all about profitability. So, how do you reduce fraud rates? How do you improve payment reconciliation? That’s where I think there is a lot of opportunity in 2023.”
If you’re a fintech founder, investor, or regulator, you might want to catch the full conversation — which also touches on regulation, talent in the industry, and crypto — below.