FinTech

Fintech Startups: Failures and the Promise to Emerge

September 24, 2017

Fintech Startups : The hottest trend today

While being a startup entrepreneur is one of the hottest and most trendy things to be in the world of technology today, the situation is pretty much grim for most startups.

If we take a quick look at the numbers, a vast majority of startup funds, about 82% to be more precise, comes from the entrepreneur himself or his family and friends. And on average, about 40% of small businesses are profitable, 30% break even and the other 30% are continuously losing money. According to a survey by NSBA, about 27% of businesses claimed that one of the major reasons behind their failure is their inability in acquiring enough funds from the investors.

Experts have different opinions about why tech startups are failing and only a few of them are able to make a mark. While some blame it on the lack of proper competitor analysis and potential investors, others consider the absence of proper marketing strategy in place to be the main reason.

Whatever the issue, this trend of failure has now started affecting the fintech startups too. Each day and month, fintech startups are forced to close down due to reasons like fund-raising cycles that are too long, missed targets, increasing losses, etc. Right now, the online lending space which includes names like OnDeck, Lending Club, CAN Capital is going through the worst scenario right now.

Fintech Startups : a Trend of Failure?

Fintech, if we consider just the term, indicates to the concept of technological intervention into personal and commercial finance. As such, fintech startups are emerging companies that intend to bring technological innovation to the field of finance and in doing so, make banking activities easy for the customers.

The concept of fintech is interesting and appealing, especially to the millennial who wants everything to be done on the go and through their mobile devices. The fresh perspective and the possible convergence of technology and big data are making the fintech industry popular. However, their future success or whether they would be able to make profits are matters that continue to be questionable.

Despite the popularity and high expectations of fintech, it is disappointing that in reality, not all is good for many fintech startups today. 

A few months back, the app-only bank Number26 encountered a tricky and difficult situation when several of their customers started closing their respective accounts. Most of these account closures went unexplained except for the citation of certain terms and conditions. After analyzing the possible scenarios and causes, Number26 is now coming up with a fair usage policy for customers which allow them to withdraw a certain amount from an ATM each month. The Spokesperson of Number26 was quoted saying, “We are offering the best products at the fairest price in the market and try to apply the lowest fees possible for all services.”

Another example is Trupay, which after facing considerable losses are now bringing about innovation in its service offering and hoping to turn profitable in the coming months. The Trupay platform is easing out the digital payment option and expecting that more than 1000 merchants will now enjoy valuable transaction, being conducted through Trupay.

According to recent reports by Michael Pearson, fintech startups Funding Circle and TransferWise are both breaking on a quarterly basis to finally reach a turning point. The bottom-line is that they needed around 5-6 years to reach profitability and this in spite of having received £267m and £70m of equity financing respectively.

Even Business Insider Intelligence, through one of its in-depth studies, points out to the fact that some of the largest Fintechs have failed to make any substantial profit. The study further went on to analyze the challenges behind such failure and intended to suggest measures for a possible overcome. Here is a list of some of the key take-aways from the said report:

– British unicorns Transferwise and Funding Circle have seen ever-increasing losses since launch — in the latter’s case to the tune of £37 million ($48 million) in its most recent filing, and are only now approaching profitability.

– The profitability question is becoming increasingly important. This owes to a combination of factors including declining VC investment in the sector and increasing pressure from existing investors to see returns. 

– Not all Fintechs want to turn a profit, however there are many who do and they, too, are facing significant challenges. Hindrances to profitability affect all Fintech segments including Neo-banking, Robo-advising, money transfer, and marketplace lending.

A study by NovitasFTCL Fintech Research further pointed to the fact that the profit margins varied between the established private Fintech and the publicly listed ones. On average, the former seemed to be growing faster than their latter counterpart at the cost of significant profitability. And even out of the 674 privately owned Fintech companies that were taken into the survey, 79% reported revenues below £6.5m while only 5% reported the total revenue to be above £50m. It was also found out that the profitability depended on various other factors like the company age, size, the ownership structure and so on.

What the future holds for Fintech Startups

It might be a tight situation for fintech startups right now but in my opinion, over time this scenario should turn around if efforts and investments are channeled in the right direction. Hopefully, we will be able to see more fintech startups attracting investments and turning profitable, bringing more innovation into the world of finance in the long run.

 

about author

I'm an independent Business consultant based in India. I actively read articles and reports on innovation in financial and business world. A value investing practitioner, I love reading about Warren Buffett, Peter Lynch, Charile Munger et. al.