Many fintechs ‘have to fix their business models,’ say VCs who invest in fintech • TechCrunch

In recent years, it’s clearly not cool to work for or bank at a traditional financial institution. Far Cooler is working or banking for one of the many fintech startups that seem to have a soft spot for the bland banking brand.

Then the Fed hiked rates, the stock market plummeted, and many fintech companies that seemed to be doing well started looking less resilient and healthy. The question now being asked 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 flat “no.” However, during a panel discussion the editor moderated in San Francisco late last week, investors weren’t embellishing things. Led by moderator Reed Albergotti (tech editor for news platform Semafor), all three acknowledged the various challenges facing the industry right now, even as they outlined opportunities.

In terms of challenges, startups and their backers have clearly gotten ahead of themselves during the pandemic, with Albergotti saying he observed that fintech is “blowing up” when “everyone is working from home” and “using lending apps and payment apps.” brilliant”, but those times became “hard” as Covid faded into the background.

“SoFi went out of business,” he said. “PayPal is shut down.” He pointed to Frank, the college financial aid platform acquired by JPMorgan in the fall of 2021, which blatantly lied about its user base to the financial services giant. “They don’t actually have 4 million customers,” Albergotti said.

Williams agrees, but says there are positives and negatives to fintech at the moment. On the positive side, she said, “it’s still early days for fintech startups from a consumer standpoint”. Based on the data she’s seen, she said, “consumer needs and desires” still exist to find new and better alternatives to traditional financial institutions.

Even more problematic, says Williams, “many of these companies have had to fix their business models, and many of the companies that go public probably shouldn’t. Many usages remain, but some fundamentals need to change.” (eg , many institutions are spending too much on marketing or now face rising delinquency costs because they use relatively lax underwriting standards compared with some traditional peers.)

Furthermore, Williams added, “Banks are not stupid. I do think they have woken up and continue to realize there are things they can do better.”

Treger also expressed concern.”It’s going to be a brutal year for some of the financial services industry, especially lending,” she said. “We’re going to see very big losses on loans . . . interest rate [rise] And the cost of capital is higher. “

That’s a challenge for many players, including larger institutions, Treyger said, noting that “even the big banks have announced that they’re doubling their loan loss provisions.” Things could be worse for tech companies, many of which “failed to survive the downturn — they started lending in the last six years or so,” which she expects to be “where the biggest casualties are.”

Meanwhile, Bent, who has led Lightspeed’s large investments in Latin America and sits on the boards of two Mexican fintechs, seemed to suggest that while U.S. fintechs may face serious headwinds, fintechs outside the U.S. continue to do well, perhaps Because there are fewer options to begin with.

It “just depends on the country you’re in,” Bent said, noting that the U.S. has “one of the highest adoption rates for fintech and wealth management services, whereas in Asia they’re actually growing in lending and consumer fintech services.” aspect is much higher.”

It wasn’t all doom and gloom, all three said. For example, Treyger recalls being part of the founding team that was later acquired by SMB lender Kabbage before becoming a VC. There, “once a month we meet with the new innovation department that XYZ Bank has just launched,” she laughs. “They’re going to want to understand how you get ideas and how you drive innovation.”

“In a downturn, CEOs and CFOs cut areas that aren’t important,” Treyger continued. “I think what’s going to happen is that all these innovative departments are going to be cut.”

When they emerge, she says, this will “create a significant opportunity for fintech companies that are building products that are basically increasing profits.” After all, CFOs “are concerned with profitability. So how do you reduce fraud rates? How do you Improving payment reconciliation? That’s where I think there’s a lot of opportunity in 2023.”

If you’re a fintech founder, investor, or regulator, you might want to watch the full conversation below – which also touches on regulation, industry talent, and cryptocurrencies.

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