Profitability has ended the halcyon days of racy valuations
The contrast between the rise of fintech profitability and the fall of banking behemoths encapsulates the quickly evolving landscape for innovative financial startups and scaleups, writes Daniel Lanyon
There is more than a little irony in 2023’s fintech biggest trend.
Fintechs made their biggest-ever push for profitability in the same year that saw the collapse or failure of some of the world’s largest banks.
Silicon Valley Bank, First Republic and Credit Suisse all buckled and then crumbled under the weight of their perilously exposed balance sheets. In the fintech world, which until recently has been more than a bit obsessed with sky-high valuations, profitability has become the most sought-after title to bestow.
The profitability push seems to be working
ClearBank, Bunq, Tandem, Revolut, Zopa, Zilch, PensionBee and Monzo are among some of the many fintech giants to say they were soon to expect to be fully profitable on an annual basis.
Fintech startups, once known for their audacious pursuit of growth at any cost, embraced profitability as a new mantra. This transformation was all the more striking against the backdrop of traditional banking giants crumbling under their own financial burdens.
The fight for profitability took centre stage throughout the year, with the industry experiencing over 3,000 announced layoffs, according to Finch Capital, which notes funding dropping 70 per cent in the first half of the year when compared to the same period last year.
Funding levels are now back at pre-2020 levels driven by an abrupt end to the large ‘mega-rounds’ and flight to quality by investors who are demanding more rigorous scrutiny of potential returns on their capital.
The repercussions of these layoffs and tighter funding conditions rippled through the sector, serving as a stark reminder of the challenging market conditions. Venture capital has become more cautious in 2023, both in terms of funding new companies but also in bolstering their existing portfolio companies.
There are two important debates within fintech’s profitability push. One is whether it is sustainable, particularly if interest rates move materially down in the next few years, hitting one of the key drivers for revenue growth, particularly for neobanks who have enjoyed surging net interest income.
The second is what it will do to long-term incentives and, therefore funding volumes, from investors. Big fintech ideas, those that address global financial problems unsolved by incumbent giants, need money to be fixed at scale if history is a guide.
While many expect the funding environment to pick up the dynamic has changed.
As KPMG recently noted, the halcyon days of major funding in structurally unprofitable companies have passed.
This new era is a reality not only for the fintech scaleups, scrambling towards profitability, but also for new entrants. Investors have shifted their focus towards topline revenue growth, better unit economics and above all a shorter pathway to reaching the sunlit uplands of profitability.
As the industry navigates these changes, one thing is clear: the fintech sector is evolving, maturing, and becoming increasingly focused on delivering sustainable financial results.
The year 2023 will be remembered as the turning point when profitability took centre stage in the fintech revolution.
Read more in the October edition of AltFi's new magazine The Financial Innovator, which is available for free here.
Daniel Lanyon is the editorial director of AltFi