Climbing inflation – affecting consumer buying habits and changing borrowing costs – is hitting investor confidence in fintech companies, but should we be surprised? Certainly, the headlines are written to grab our attention – pointing to market events such as buy-now-pay-later firm Klarna’s recent drop in value from $46 billion to $6.7 billion. Stripe – a payment processor popular with online merchants – has also been in the news following a fall in its internal share prices. And taking a broader view, financial data firm Pitchbook notes that fintech is seeing “one of its weakest quarters on record” based on the company’s latest Emerging Tech Indicator report published in August 2022.
Signals in the noise
There are also other indicators that fintech is going through a rough patch. Tech layoff tracker Layoffs.fyi, often cited by Techcrunch and others, is another barometer of what’s happening across IT-related industries, including fintech. Browsing the data, both fintech and retail segments register high on the list of layoffs, pointing to the difficulties of the current economic climate (Klarna trimmed its team by around 10% in the first half of 2022, noting ‘tumultuous’ economic circumstances ). But what do the fintech founders say?
Sebastian Siemiatkowski, who has run Klarna for 17 years, seems pragmatic and notes that the company has navigated tough market conditions before. What may worry investors, however, is that the firm – which has been profitable for much of its existence – has reported widening losses since 2019. But those losses are a result of costs incurred as it expands into the US and other major markets , which Klarna no doubt hopes will pay off in terms of adding the new customers and retail partners necessary to stay ahead.
According to the company’s latest full-year results, announced in February 2022, Klarna increased the number of users by almost a third – bringing the total up to 147 million, in 45 countries. And the company has brought in several big brands, showing that the fundamentals are still compelling enough for established firms to sign up. Klarna earns its money through payments made by retailers when users shop on partner websites, or in stores with Klarna. The firm also offers credit to consumers for larger purchases over a period of 6-36 months, but most of the company’s buy-now-pay-later transactions (‘Pay in 30 days’ and ‘Pay in 3 installments’) are free for shoppers .
Strong headwind
Over the years, Klarna has built its business by making it easy for digital sellers to offer buyers the opportunity to try before they buy and the ability to spread the cost if they decide to keep the items – an offer that remains attractive based on the company’s numbers . Of course, Klarna does not have the online shopping market to itself, but even giants in the sector such as Paypal are experiencing a drop in investor confidence. Paypal stock has fallen from a peak of over $300 per share in July 2021 to a market price of $93 today. Also remember that Paypal owns mobile payment company Venmo, which reported 50% growth in Q2 2022 and claims to have nearly 90 million accounts in the US.
According to the firm, consumers are 19% more likely to complete a purchase with Venmo compared to traditional payment methods, which could indicate that it’s regular banks that could end up in a pinch instead of fintech. Cycling back to Stripe, which was referenced at the top of this piece, there are several signs that digital players are not only creating new opportunities online, but also attracting customers away from traditional service providers. Global container shipping giant Maersk turned to Stripe in May 2022 to streamline its payment operations, which before the integration were “fragmented across multiple vendors.” Now, thanks to Stripe’s digital services, Maersk operates a “simple, flexible payment portal” that allows customers to use credit cards, a payment method that was not possible before and hints at the old architecture that must have creaked in the background until now.
Digital strategies the key
So the takeaways are that while valuations for fintech firms may grab the headlines, it may be service providers that have been slow to digitize their offerings to customers who are proving most vulnerable as “tumultuous” economic conditions blow through the market. Apple is again showing the success of its credit card – which is issued by the American financial company Goldman Sachs – based on the results of a recent industry survey. The financial product, which was first launched in 2019, links Apple’s digital ecosystem with the world of credit and is another wake-up call for banks that feel their digital strategies are lacking. In fact, the success of the card could have revealed another sign that traditional banking is struggling to catch up. On page 98 of Goldman Sachs’ latest Form 10-Q (PDF) – a mandatory quarterly financial filing for US publicly traded firms – the bank acknowledges that it is ‘cooperating with the Consumer Financial Protection Bureau in connection with an investigation into GS Bank USA’s practices for managing credit card accounts. These include processes such as applying refunds and billing error resolution.
