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Many fintechs “need to adapt their business models,” say VCs investing in fintechs – TechCrunch

In recent years, working for or banking with a traditional financial institution has definitely not been cool. Much cooler was working for or banking with one of the many fintech startups that seemed to turn their noses up at tough banking brands.

Then the Federal Reserve raised interest rates, stocks fell, and many fintech outfits that seemed to be doing well began to look much less strong and healthy. The question that now arises is whether fintech in a broader sense has lost its mojo.

In a panel discussion hosted by this editor late last week in San Francisco, the answer was a resounding no, though the panelists — Mercedes Bent of Lightspeed Venture Partners, Victoria Treyger of Felicis, and Jillian Williams of Cowboy Ventures — didn’t sugarcoat things either.

Led by moderator Reed Albergotti — the news platform’s technology editor Traffic lights — all three VCs recognized different challenges in the industry at this time, but also outlined opportunities.

As for the challenges, startups and their backers were clearly ahead of the game during the pandemic, Albergotti suggested, noting that fintech was “gangbusters” when “everyone was working from home” and “using loan apps and payment apps,” but those times have changed became “tough” as Covid has faded into the background.

“SoFi is down,” he said. “PayPal is disabled.” He brought up Frank, the college financial aid platform that was acquired by JPMorgan in Fall 2021 by lying to the financial services company about its user base. Said Albergotti, “They don’t really have 4 million customers.”

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

More problematic, Williams said, is “many of these companies need to improve their business models, and many of those that went public probably shouldn’t have. A lot of the usage is still there, but some fundamentals need to be shifted.” (For example, many outfits have overspended on marketing, or are currently facing rising delinquent fees because they’ve used relatively loose underwriting standards compared to some of their traditional counterparts.)

Further, Williams added: “The banks are not stupid. I really think they have woken up and are still waking up to things they can do better.

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

It’s a challenge for many players, including larger outfits, Treyger said, noting that “even the big banks have announced they’re doubling their loan-loss reserves.” Still, she said, things could prove even worse for fledgling fintechs, many of which “didn’t make it through a recession — they started borrowing in the last six years” and where she expects to see “the most casualties.”

Meanwhile, Bent, who leads much of Lightspeed’s Latin American investments and sits on the boards of two Mexico-based fintechs, seemed to suggest that while U.S. fintechs may be facing serious headwinds, fintech outfits outside the U.S. might keep doing good. because there were fewer alternatives to begin with.

It “just depends which country you are in,” Bent said, noting that the US “has one of the most widely used fintech and asset management services, while in Asia they rank much higher in terms of loans and their fintech services for consumers.”

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

What happens in a recession is CEOs and CFOs cut back on the areas that aren’t critical, Treyger continued, “and I think what’s going to happen is all these innovation arms are going to be cut off” and when that happens is, it will “create significant opportunities for fintechs building products that essentially contribute to the bottom line.” After all, CFOs are all about profitability. So how do you reduce fraud rates? How do you improve payment reconciliation? That’s where I think there’s a lot of opportunity in 2023.”

You can follow the full conversation – which also covers regulation and crypto – below.

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