In recent years, working or banking with a traditional financial institution was decidedly uncool. Much cooler was working or banking with one of the many fintech startups that seemed to be moving into heavy banking brands.
Then the Federal Reserve raised interest rates, stocks closed, and many fintech teams that seemed to be doing well started to look a lot less resilient and healthy. The question now is whether fintech as a subject 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 a resounding “no.” At a roundtable hosted by this editor late last week in San Francisco, however, investors didn’t sugarcoat things, led by moderator Reed Albergotti, technology editor at news platform Semafor, all three acknowledging a variety of of challenges in the sector. now, even as they describe opportunities.
In terms of challenges, startups and their backers were clearly ahead during the pandemic, Albergotti suggested, noting that fintech was “going gangbusters” when “everyone was working from home” and “using lending and payment apps “, but that times have passed. became “tough” as Covid faded into the background.
“SoFi is down,” he said. “PayPal is down.” Frank, the college financial aid platform that was acquired by JPMorgan in the fall of 2021, came up with lying to the financial services giant about its user base. Albergotti said, “They don’t actually have 4 million customers.”
Williams agreed, but said there are positives and negatives for fintechs right now. On the bright side, he said, “from a consumer standpoint, it’s still early days” for fintech startups. He said “consumer demand and desire” still exists for new and better alternatives to traditional financial institutions” based on the data he has seen.
The most problematic thing, Williams said, is “that a lot of these companies have to fix their business models, and a lot of the ones that went public probably shouldn’t. A lot of the usage is still there it is, but some of the fundamentals need to be changed.” (Many teams, for example, overspent on marketing, or are now facing rising delinquency costs, having used relatively lax underwriting standards compared to some of their traditional counterparts.)
Additionally, Williams added, “Banks are not stupid. I think they’ve woken up and continue to wake up to things they can do better.”
Treyger also expressed concern. “Certain sectors of financial services are going to have a brutal year ahead,” he said, “and lending in particular. We’re going to see very large loan losses . . . because, unfortunately, it’s like a triple whammy: consumers are losing their jobs, the interest rates [rise] and the cost of capital is higher”.
It’s a challenge for many players, including the biggest teams, Treyger said, noting that “even the big banks announced they were doubling their loan loss reserves.” Still, she said, it could turn out to be worse for young fintechs, many of whom “haven’t stayed in a crisis — they started lending in the last six years or so,” and that’s where she hopes ” see more casualties.”
Meanwhile, Bent, who leads many of Lightspeed’s Latin American investments and sits on the boards of two Mexico-based fintechs, seemed to suggest that while US fintechs may be facing serious headwinds, the Fintech teams outside the US continue to perform well, perhaps. because there were fewer alternatives to begin with.
“It just depends on what country you’re in,” Bent said, noting that the U.S. has “one of the highest adoptions of fintech and wealth management services, while in Asia, it’s actually much higher in loans and its consumer fintech services.”
It’s not all doom and gloom, all three said. Treyger explained, for example, that before he became a VC, when he was part of the founding team of the since-acquired lender SMB Kabbage, that “once a month, we would meet with the new innovation group who just formed bank XYZ. . And they’d like to learn how you get ideas and drive innovation.”
What “happens in a recession is that CEOs and CFOs cut back on areas that aren’t critical,” Treyger continued, “and I think what’s going to happen is that all those arms of innovation are going to be cut,” and when they are , will create “a significant opportunity for fintechs that are building products that essentially add to the bottom line.” CFOs are, after all, all about profitability. So how do you reduce fraud rates? How do you improve payment reconciliation? That’s where I think there’s a lot of opportunity in 2023.”
You can watch the full conversation, which also discusses regulation and cryptography, below.
