Venture capitalists who invest in fintech companies say that “many fintechs have to overhaul their business models”.

In recent years, working for or doing business with a traditional financial institution has been decidedly unkind. Far Cooler was working for one of the many fintech startups that appeared to be taking on sleazy bank brands.

Then the Federal Reserve raised interest rates, stocks plummeted, and a lot of the fintech companies that seemed to be doing so well started to look a lot less. Hardy and Hill. The question now is whether financial technology has lost its charm in general.

in a panel discussion Hosted by this editor Late last week in San Francisco, the answer was no, although the panelists—Mercedes Bent of Lightspeed Venture Partners, Victoria Trigger of Felicity, and Gillian Williams of Cowboy Ventures—were not wearing the stuff either.

Led by moderator Reed Albergotti – technology editor for the news platform semaphore All three venture capitalists acknowledged a variety of challenges in the industry right now, but also identified opportunities.

In terms of challenges, it’s clear that startups and their backers have gotten ahead of themselves during the pandemic, Albergotti suggested, noting that fintech was “going gangbusters” when “everyone was working from home” and “using lending apps and payment apps” but in Those times turned ‘tough’ as ​​Covid faded into the background.

He said “SoFi is down”. “PayPal is disabled”. He brought up Frank, the college financial aid platform that JPMorgan took over in the fall of 2021 by lying to the financial services giant about its user base. Albergotti said, “They don’t really have 4 million customers.”

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

What’s more problematic, Williams said, is that “a lot of these companies have to overhaul their business models, and a lot of the companies that went public probably shouldn’t. There’s still a lot of use out there, but some fundamentals need to change.” (For example, many institutions have spent too much on marketing, or are now facing higher late payment costs, having used relatively loose underwriting criteria compared to some of their traditional peers.)

Furthermore, Williams added, “Banks are not stupid. I think they woke up and keep waking up for things they can do better.”

Trigger also expressed his concerns. She said: “Certain sectors of financial services are going to have a tough year ahead, particularly lending. We’re going to see very large losses in lending… because unfortunately it’s like a triple whammy: consumers lose their jobs, interest rates [rise] And the cost of capital is higher.”

It’s a challenge for a lot of players, including larger institutions, Treasure said, noting that “even the big banks have announced they’re doubling their loan-loss reserves.” However, it could be worse for young fintechs, she said, “a lot of which didn’t make it through the downturn — they started lending in the last six years or so” and is where you’d expect to “see the most casualties”.

Meanwhile, Bennett, who leads much of Lightspeed’s investments in Latin America and sits on the boards of two financial firms based in Mexico, seems to indicate that while US fintechs could face serious headwinds, out-of-state fintechs may face serious headwinds. United continue to do so well, perhaps because there were fewer alternatives to start with.

It “just depends on what country you’re in,” Bent said, noting that the US has “one of the highest adoptions of fintech and wealth management services, while in Asia, it’s actually much higher in consumer lending and fintech services.”

The three said: Not everything is gloomy and gloomy. Treasure, for example, recounted that before she became a VC, when she was part of the founding team at since acquired Cabbage, the SME lender, says, “We’ll meet once a month with the new innovation arm that was just formed by XYZ Bank. And they’d like to know how to get ideas and how to drive innovation.”

“What happens in a downturn is CEOs and CFOs cut back on non-critical areas, and I think what’s going to happen is all those levers of innovation are going to be snapped,” Treasure continued, and when that’s done, it will create “huge opportunity for fintech companies that are building products that add foundation.” to the bottom line.” CFOs are, after all, “it’s 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 touches on regulation and cryptocurrency — below.

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