CB Insights
Fintech Report:
Zombies

Around Us?

CB Insights released its global Fintech report last week.

On a high level, it’s no surprise that funding flowing into fintech startups was down both globally and in the U.S. in the second quarter of 2022. And not only funding. Everything was down. New unicorn births, M&As, IPOs.

But the results are not as gloom and doom as they may seem at first glance.

First, Q2 funding drops to $20.4B vs $30B QoQ and 38B YoY, but it is still quite higher pre-covid levels where funding was about 10–13B per quarter.

Wealth tech funding even stays flat at $3.5B, deals increase 36% QoQ. Banking is the most fallen sector, funding drops 77% YoY to hit its lowest level since 2019. But this is also ok, neobanking was builded enough.

Second, 20 new unicorns. Yes, this is two times less than it was in 2021, but also several times more than the pre-covid era. Among them are Coda (payments), Newfront Insurance, Pave (lending marketplace) and so on.

Third, fintech continues to account for a significant share of global funding. In 2021, an estimated 21% of all venture deals were fintech. In 2022, investment into fintech startups was about 19%. Fintech is still attracting serious investor interest, or at least repels them no more than other sectors.

But fundraising is more of a lagging indicator. It’s clear, the VC funds committed big money in the calm 2021 and they need to place them somewhere. The leading indicator is the primary and secondary market, and here everything is bad. There was no big IPO in 2022. And the fintech sector has lost half of its capitalization since the beginning of the year.

Shares in recently listed fintechs have fallen an average of more than 50 per cent since the start of the year, according to a Financial Times analysis, compared with a 29 per cent drop in the Nasdaq Composite. Their cumulative market capitalisation has fallen $156bn in 2022. If each stock is measured from its all-time high, around $460bn has been lost.

In total, since 2020, about 50 fintechs have gone on IPO, more than 30 of them in the USA. Among them was:

• Toast — $30 bln,
• NuBank — $42 bln,
• Grab — $40 bln,
• Marqueta — $15 bln,
• Wise — $11 bln,
• Affirm — $12 bln,
• SoFi — $9 bln,
• RobinHood — $32 bln and so on and so forth.

These numbers look crazy today.

The general forecast was that the acceleration of the pace of digitalization amid the covid pandemic could bring them tangible profits in the long term. Many IPOs were accompanied by multiple oversubscriptions, the price of many shares increased several times within a year after entering the market. However, concerns about rising interest rates, lack of profits and untested business models as the economy heads towards a potential recession have put them at the sharp end of this year’s sell-off.

The valuation of credit fintechs fell especially strongly. Now Affirm price is at 28$, IPO — 100$, high — 160$. Upstart price is at 30$, IPO — 40$, high — 320$. The situation is similar for private companies, most recently Klarna raised an $800 mln round at a valuation of $6.7 bln, 85% lower than the $46 bln it was worth last year.

The narrative is starting to change on the secondary market and spill over into the venture capital market as well. Previously, the narrative was to increase the customer base as quickly as possible, albeit at heavy losses. And maybe, someday, far in the future, firm X will cross-sell them with a variety of products that don’t even exist yet, and become a classic profitable company that pays dividends to investors. Investors have once again been fooled into thinking that the new narrative is growth metrics and being profitable is not necessary. The many 2021 IPOs prove it.

The funds also knew that at the end point — exit (IPO or MA) their investments would grow if quantitative metrics grew, and did not worry about the company profitability. If a startup grew quickly, it was guaranteed to attract a new round at exorbitant estimates. Now everything is back to normal, the old «be profitable» narrative is with us again. A lot of pitches constantly pass through my hands, and if earlier they focused on growth, now startups explain when and how they can become profitable.

It is already quite obvious that venture funds have become very risk averse and will require fintechs to show profit. And fintechs have to start showing it and to do this, radically rebuild their model. But can they?

I know the situation in one European neobank, which tried to straighten out profitability at the request of shareholders from 2020. To do this, it cut the product line, increased tariffs, changed positioning — it called itself a green ESG bank, but it got only a customer outflow and nothing more.

It will be especially difficult for fintechs with a B2C model. As a rule, their basic product — a marketing hook — is free (accounts, conversion, etc.), they don’t have many other products and generally ignored credit ones. And either fintechs will need to launch a bunch of profitable products at the moment or make the basic product paid, but then it’s not clear how customers will react to this and whether they will return to banks. The piquancy is added by the fact that fintechs will have to raise tariffs quite sharply, and the customers react most strongly to this sharpness.

Another story from my own experience. Several years ago, in order to increase the profitability of the business, the bank that I once headed greatly worsened the terms of loyalty program and deposit rates for retail clients. As a result, NPS fell by 18 points from 54 to 36, customers did not like this harshness and inconsistency of pricing policy. It took us more than a year to start regaining the loyalty of the customers. However, despite a lot of efforts, even after a year NPS recovered by only half to 45.

Or let’s take a look at Tinkoff Bank, which was regarded one of the best in the world and is now hated by everyone because it dramatically worsened its tariff conditions. Has it become much worse than other banks? No, but before that it was «the only one», now it is like everyone else and its clients can’t forgive him for this and are ready to go to another bank.

Therefore, Q3 for fintech should become much harder. They really have a mega-difficult task to reach some kind of positive result, at least in terms of operating profit. And if they don’t, they may not raise a next round or do it at a price 10 times lower than the previous one.

There are many M&A deals ahead of us, many fintechs will not pass the test by the crisis and will be eaten by the banks, which will further strengthen their positions.

Investors will write off their investments, and customers will lose cheap or free services that fintechs used to provide them at the investors’ expense. «Bird in the hand is worth two in the bush» is back in fashion again.

Special thanks to Sergei Khairullin for collaboration on writing this article.