Many fintechs “need to fix their business models,” say VCs investing in fintechs • TechCrunch

In recent years, it has been uncool to work for or bank with a traditional financial institution. Far cooler worked for or banked with one of the many fintech startups that seemed to thumb their noses at heavy bank brands.

Then the Federal Reserve raised interest rates, stocks fell, and many fintech outfits that seemed to be doing well began to look far less resilient and healthy. The question being asked now is whether fintech more generally has lost its mojo.

In a panel discussion hosted by this editor 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 — weren’t sugarcoating things, either.

Led by moderator Reed Albergotti – the technology editor of news platform Semafor – all three VCs acknowledged a number of challenges in the industry right now, but they also outlined opportunities.

On the challenge front, startups and their backers clearly got ahead of themselves during the pandemic, suggested Albergotti, observing that fintech went “gangbusters” when “everyone was working from home” and “used lending apps and payment apps”, but that times have become “tough” as Covid has faded into the background.

“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, by lying to the financial giant about its user base. Said Albergotti, “They don’t really have 4 million customers.”

Williams agreed, but said there are positives and negatives to fintech right now. On the bright side, she said, “from a consumer standpoint, it’s still pretty early days” for fintech startups. She said “consumer demand and desire” still exists for new and better alternatives to traditional financial institutions” based on the data she’s seen.

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. A lot of the usage is still there, but some of the fundamentals have to change.” (Many outfits, for example, overspent on marketing, or now face rising crime costs, having used relatively lax underwriting standards compared to some of their traditional counterparts.)

Furthermore, Williams added: “The banks are not stupid. I think they have woken up and continue to wake up to things they can do better.”

Treyger also expressed concern. “Certain financial services sectors are going to have a brutal year ahead,” she said, “and lending in particular. We’re going to see very large losses on lending . . . because unfortunately it’s like a triple whammy: consumers losing their jobs, interest [rise] and capital costs are higher.”

That’s a challenge for many players, including larger outfits, Treyger said, noting that “even the big banks announced they’re doubling their loss reserves.” Still, she said, things could turn out to be worse for young fintechs, many of which haven’t “made it through a downturn — they started lending in the last six years or so,” and that’s where she expects to “see most victims.”

Meanwhile, Bent, who leads many of Lightspeed’s investments in Latin America and sits on the boards of two Mexico-based fintechs, appeared to suggest that while US fintechs may face serious headwinds, fintech outfits outside the US continue to perform well , perhaps because there were fewer options to begin with.

It “just depends on which country you’re in,” Bent said, noting that the U.S. has “one of the highest adoption of fintech and wealth management services, while in Asia they’re actually much higher in lending and their fintech services for consumers.”

It’s not just doom, all three said. For example, Treyger recounted that before she became a VC, when she was part of the founding team at then-acquired SME lender Kabbage, “once a month we would meet with the new innovation arm that was just formed by bank XYZ . And they want to learn how to get ideas and how to drive innovation.”

What “happens in a downturn is CEOs and CFOs cut back on the non-critical areas,” Treyger continued, “and I think what’s going to happen is that all these innovation arms are going to be cut” and when they are, it will create “significant opportunity for fintechs building products that fundamentally add to the bottom line.” After all, CFOs are “all about profitability. So how do you reduce the fraud rate? How do you improve payment reconciliation? That is where I think there are many opportunities in 2023.”

You can watch the full conversation – which also touches on regulation and crypto – below.