In recent years it has been downright uncool to work or do banking for a traditional financial institution. Far cooler was working for or banking with one of the many fintech startups that seemed to turn their noses up at stodgy banking brands.
Then the Federal Reserve hiked interest rates, stocks plummeted, and many fintech companies that seemed to be doing well began to look far less resilient and healthy. The question that now arises is whether fintech, more broadly, has lost its mojo.
In a panel discussion hosted by this editor in San Francisco late last week, the answer was a resounding no, although the panellists — Lightspeed Venture Partners’ Mercedes Bent, Felicis’ Victoria Treyger, and Cowboy Ventures’ Jillian Williams — didn’t sugarcoat things, either.
Led by moderator Reed Albergotti – the technology editor of news platform Semafor – all three VCs acknowledged a variety of current challenges in the industry, but also outlined opportunities.
In terms of challenges, startups and their supporters have clearly outdone themselves during the pandemic, Albergotti suggested, noting that fintech “went gangbuster” when “everyone worked from home” and “credit apps and payment apps used’ but times have been ‘tough’ as Covid has taken a back seat.
“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, for 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 for fintechs right now. On the plus side, she said, “it’s still pretty early days from a consumer perspective” for fintech startups. She said that “consumer demand and desire” for new and better alternatives to traditional financial institutions is still there,” based on the data she saw.
More problematic, according to Williams, “is that many of these companies need to correct their business models and many of the companies that have gone public probably shouldn’t have done it. Much of the usage is still there, but some of the fundamentals need to be shifted.” (Many companies, for example, have overspent on marketing or are currently facing rising downtime costs due to comparatively lax underwriting policies compared to some of their traditional counterparts. standards applied.)
Williams also added, “Banks are not stupid. I think they’ve woken up and will continue to see things they can do better.”
Treyger also expressed concerns. “Certain financial services sectors are in for a brutal year,” she said, “and lending in particular. We will see very large losses in lending. . . Because unfortunately it’s like a triple whammy: Consumers lose their jobs, interest [rise] and the cost of capital is higher.”
It’s a challenge for many players, including larger companies, Treyger said, noting that “even the big banks have said they will double their loan loss reserves.” Still, she said, things could prove worse for fledgling fintechs, many of which “haven’t weathered a downturn — they’ve started lending in the last six years” and where she expects “most of the losses.”
Meanwhile, Bent, who leads many of Lightspeed’s investments in Latin America and sits on the board of two Mexico-based fintechs, seemed to suggest that while US fintechs may face serious headwinds, non-US fintech companies may continue to do well because initially there were fewer alternatives.
It “just depends on what country you’re in,” Bent said, noting that the US “has one of the highest adoption rates of fintech and wealth management services, while in Asia they have the highest adoption rates for lending and their fintech services.” for consumers are actually much higher. ”
It’s not all doom and gloom, all three said. For example, Treyger shared that before she became a VC, when she was part of the founding team at now-acquired SMB lender Kabbage, “we met once a month with the new innovation arm that was just being formed by Bank XYZ. And they want to learn how to come up with ideas and how to drive innovation.”
What “happens in a downturn is that CEOs and CFOs make cuts in the areas that aren’t critical,” Treyger continued, “and I think what’s going to happen is all those lines of innovation get cut,” and if they are, it will create “significant opportunities for fintechs that build products that essentially add profit.” After all, CFOs are “all about profitability. So how do you reduce fraud rates? How do you improve payment reconciliation? I see many opportunities here in 2023.”
You can follow the full conversation – which also touches on regulation and crypto – below.