2022s store FinTech Refocus | PYMNTS.com

Was FinTechs overrated when 2021 ended and 2022 started? In some cases for sure. It has brought us to the brink of the great FinTech refocus – and yes, there will be winners and losers.

Venture capitalists are shutting down the money left and right as the pandemic party, so to speak, ends in an inflationary implosion that reveals excessive consumers and overfunded FinTechs that were smart and even valuable, but perhaps not lasting.

“To say that these are extraordinary times is a great understatement,” i2c President Jim McCarthy told PYMNTS ‘Karen Webster. “To put it in the context of the beginning of this year, we kind of played through some of what I would call real disasters that we kind of skipped over, like the WeWork situation. [but] in the FinTech area.

“Maybe you can throw Bolt into the conversation with exaggerated numbers,” he said. “Then you start thinking that some of these ideas were interesting, but I’m not sure they were permanent.”

When times get tough, so do VCs. “You add the macroeconomic conditions, and I think you see, for lack of a better concept, a flight to quality,” McCarthy said. “Investors … have taken a beating on the balance sheet, and the funding of Journey concerts at Money 2020 is starting to feel like 2000 again.”

Comparisons with the dot-com bubble that burst in 2000 and the housing market crash in 2008 are inevitable, with the caveat, as Webster pointed out, that FinTechs created this situation using its deep pockets – a targeted focus on hyper-growth, often without a sustainable model underneath.

“Human nature is a fun thing,” McCarthy said. “When money was cheap and the fear of missing out ruled the world, you would not be the guy who did not invest in something that had hypergrowth. [potential]even if you did not really believe it was the playoffs. “

We have seen this program again a few times since 2000 – and 22 years later, the siren song still plays about ongoing valuations that reward growth without much concern for profitability.

See also: FinTech lenders follow banks into uncertain economic climate

Check your business model

McCarthy noted that at times like this, even concepts with legs can be punished.

He pointed to a FinTech that has been hit now, saying: “Even good companies, super fantastic companies, let’s use Stripe as an example, [get hit] I forget what I saw, a decline in value of 35%? And it’s a business, “he added,”[that] I think most people really believe in what the founders built. “

He continued, “Then again, if you look at some of the other non-monetary models that may have credit risk in the balance sheet in an environment where interest rates are rising, inflation is going through the roof, [and] you have not been through a credit crunch, what will it look like? ”

Fair question, and we’re starting to get an idea in the second quarter as valuations get confused and talks move to consolidation via mergers and acquisitions – or a fire sale.

Ironically, McCarthy sees crypto as a sector that can come out intact. Take bitcoin, for example – what he called “the grandfather of all crypto.” By design, only 21 million of them will ever exist, and he believes the law of supply and demand will eventually put an end to the speculative madness that has led to wild price fluctuations in the past. People buy and hold bitcoin in the long run – and “we are not even close to touching the beginning of it when it comes to valuations.”

By setting aside web3 and metaverse use cases at the moment as ear candy for investors, he said, “there is a middle ground between just using cryptocurrencies and tokens to plummet new federated blockchains, new use cases. I think there are still some interesting things that can come from it. Clearly, cross-border trade, B2B use cases and what the GPM coin did. ”

There is no one to get around the volatility in crypto and remove visions of making money on metaverse and web3, but he is not mad at them either. “If you think this will be a community that exists in the future with users who are very engaged, and like most other things follow advertising and commerce, you need easy ways to pay for things inside the metaverse.”

See also: Amex, i2c Launches payment platform for FinTechs

18 tough months ahead

Speaking as one who has navigated through all the economic disasters of the last two decades or so, McCarthy is steely, yet happy about the connected economy, which he says “is here to stay.”

But the red inflation warning for the “black swan” in 2022 woke VCs from their recurring dream of endless hyper-growth companies. As he said, “The numbers were staggering because the only way you could buy anything in the last two to three years was through digital means. The numbers were just so big on a year-to-year basis, [and now] they will return to the earth. “

The great FinTech refocusing takes place at the same time as – and to a certain extent due to – the great reopening. People are re-engaging with the physical world, and some digital-native and digital-first concepts had to be deflated while rewarding others.

McCarthy mentioned at a recent conference – which he traveled to and attended personally – that people have consumed 41 billion hours of Roblox games to date.

“Do the math on it,” he said. “Back to the consumption of digital goods, digital media, where people spend their time, TikTok or others, this does not disappear in the first place.”

But he referred to the Fed’s impending rate hike and the tightening of the belt across companies, and told Webster that dozens of CFOs see a recession in the first half. “Forget whether it happens or not,” he said. “You are now in the minds of CFOs of large companies. If they think so, they are telling people about hiring, and they are not going to invest in things. “

Which brings the discussion back to the big FinTech refocus in 2022.

McCarthy’s current outlook is that “we have at least 18 months ahead of us before the clouds begin to separate, we begin to see the way out of this. Hopefully the war between Russia and Ukraine will end sometime before that, which will go a long way, I think, to make people feel better.

When it resolves, so will the climate for FinTechs, as VCs and banks regain confidence and start funding next-generation technology across the entire payment product portfolio.

Some winners will not need “fortress balances”, he said, “but solid balances with real revenues and the operation of real businesses that have operating margins.” They will go on shopping expeditions for M&A opportunities.

“You can bottom out and pick up things that were too expensive a year ago that you needed to help you grow your business, whether it’s international expansion, new functionality, tuck-ins that drive top-line growth.”

Ultimately, McCarthy said, many FinTechs are built on shaky fundamentals. And the combination of high customer acquisition costs and high churn is a recipe for strong initial growth that is likely to be unsustainable in the long run. Given their high dependence on exchange earnings, he said, neo-banks in particular may have a tough time surviving if the economy continues to sour.

McCarthy sees strong analogies to the dot-com boom and bust of the early 2000s – and also to the recession of 2008, when PayPal emerged from the ashes because it exploited an unmet consumer need.

“If you look at the area I operate in, only a handful of players support the vast majority of FinTech,” he said. “I fully expect to see that there will be one or two coming out of this, [because] they had a better business model, they have better investors who are willing to play the long game, and I think it’s an opportunity to double and gain market share and get stronger out of it. “