In recent years, working for or doing business with a traditional financial institution has not been okay. Far cooler has worked for or done business with one of the many fintech startups that seem to be poking their noses at bad bank brands.
Then the Federal Reserve raised interest rates, stocks fell, and many fintech companies that seemed to be doing well began to look much less resilient and healthy. Now the question is whether fintech in the broader sense has lost its modus operandi.
In a panel discussion this editor moderated late last week in San Francisco, the answer was a resounding no, although the panelists — Mercedes Bent of Lightspeed Venture Partners, Victoria Treyger of Felicis and Jillian Williams of Cowboy Ventures — didn’t sugarcoat things, either.
Led by moderator Reed Albergotti — technology editor of news platform Semafor — all three VCs acknowledged the different challenges in the industry right now, but also highlighted the opportunities.
As for the challenges, startups and their backers clearly got ahead of themselves during the pandemic, Albergotti said, noting that fintech “started gangbusters” when “everyone was working from home” and “using lending and payment apps,” but that past times became “difficult” as Covid faded into the background.
“SoFi doesn’t work,” he said. “PayPal is not working.” He mentioned Frank, a college financial aid platform that was acquired by JPMorgan in the fall of 2021 by lying to the financial services giant about its user base. Albergotti said, “They don’t really have 4 million customers.”
Williams agreed, but said there are positives and negatives to fintech right now. On the plus side, she said, “from a consumer standpoint, it’s still pretty early days” for fintech startups. She said that “consumer demand and desire” still exists for new and better alternatives to traditional financial institutions” based on the data she has seen.
Even more problematic, 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 have done that. A lot of it is still being used, but some of the fundamentals need to change.” (Many businesses, for example, have overspent on marketing or are now facing rising costs of sloppiness, having used relatively lax risk-taking standards compared to some of their traditional counterparts.)
Furthermore, Williams added: “Banks are not stupid. I think they woke up and are still waking up to things they can do better.”
Treyger also expressed concern. “Certain sectors of financial services are in for a brutal year,” she said, “especially lending.” We will see very large losses in lending. . . because unfortunately, it’s like a triple whammy: consumers lose their jobs, interest rates [rise] and the cost of capital is higher”.
That’s a challenge for many players, including larger firms, Treyger said, noting that “even the big banks have announced that they are doubling their loan loss reserves.” Still, she said, it could turn out to be worse for young fintech firms, many of which “didn’t make it through the crisis — they started lending in the last six years or so” and where she expects to “see the most casualties.”
Meanwhile, Bent, who leads many of Lightspeed’s investments in Latin America and sits on the board of two Mexico-based fintech companies, seemed to suggest that while US fintech companies face serious problems, fintech companies outside the US still have good results, perhaps because there were fewer alternatives in the beginning.
“It just depends on what country you’re in,” Bent said, noting that the US has “one of the biggest adoptions of fintech and wealth management services, while in Asia they’re actually much more into lending and their consumer fintech services. “
It’s not all doom and gloom, said all three. Treyger recounted, for example, that before she became a VC, when she was part of the founding team at later-acquired SME lender Kabbage, “we would meet once a month with the new innovation arm that XYZ Bank had just started . And they would like to learn how to get ideas and how to drive innovation.”
What “happens in a crisis is 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 innovation branches are going to be cut,” and when that happens, it will create “a significant opportunity for fintech companies that create products that fundamentally contribute to the bottom line.” CFOs, after all, “are all about profitability. So how do you reduce fraud rates? How to improve payment matching? That’s where I think there are a lot of opportunities in 2023.”
You can watch the full conversation – which also touches on regulation and crypto – below.