Doubts About the Business Models of FinTech Startups Are Growing

Since its emergence and through the course of rapid growth, the FinTech ecosystem has shed a lot of barriers and broke the traditional state of the financial services industry which was heavily dominated by international banking giants.

Not only has FinTech has transformed our expectations and the way we used to consume financial services, but the very fundamentals of conducting business have been questioned. And while FinTech was growing, there wasn’t much of a hesitation as long as startups were able to gain outstanding market traction. But over time, as hot startups tied closely with established institutions and sustainability of the whole banking industry suddenly became somewhat tied to survival of those startups, doubts have been cast over the hype about FinTech startups that are raising funds even being unprofitable in some cases.

A common trait among the FinTech startup community mentioned yesterday by BI is that many startups have underpinned their promises with services delivered either at cost or with razor-thin profit margins.

The examples brought by the source are TransferWise, FinTech unicorn providing money transfer services, which charges just 0.5% on top of the mid-market rate on many international money transfers, and Revolut, which lets people spend money at the best rate abroad on its card with no commission.

Clearly, the approach doesn’t particularly go along with the goal to make money in a reasonable time. TransferWise, for information, reported a loss of £11.4 million (a year before it was £2 million) in aggressive expansion race with hiring and expensive advertising campaigns. However, the company still was able to raise $117 million that will be used to improve the loss-making startup’s balance sheet as it continues to plough all revenue into future growth.

Another example is Elevate, an online credit solutions provider, that is struggling to overcome a crucial hurdle faced by subprime lenders – high default rates. The NYT yesterday brought up the fact the company’s documentation demonstrates a large proportion of the loans it underwrites that are likely to never be repaid. It appears that net charge-offs represent about half of the company’s annual revenue – quite a significant price tag for an unprofitable company.

The Alibaba-backed Lazada is also a case when an unprofitable company ‘successfully’ operates by billing a powerful patron. The e-commerce company is reported to have an operating loss of $233 million during the first nine months of last year over $191 million in sales. The loss was driven mostly by the cost of acquiring users, incentives paid to merchants and general marketing costs.

Editions covering foreign markets also noticed that tech startups that are unprofitable are still raising significant capital.

Turning to other segments, it is worth mentioning the fair questions being asked by banking professionals about challenger banks. In April this year, Benoit Legrand, Head of FinTech at ING, commented, Frankly, if you look at the neobank space — they’re flourishing everywhere but we’re still waiting for the business model to show up. Where is the money? Where is the return?

It’s good to acquire customers but I can tell you when we started ING Direct, it was a 10 to 15 years’ process. Eventually, we accumulated about €1 billion of losses. It’s not €20 million of capital you need if you really want to be serious, he added emphasizing the hunt for customers.

Some suggest that business models of FinTech startups are not sustainable and companies are growing and able to function only because of the VC and corporate funding streams.

The Lending Club story is a card that will be played plenty by those casting doubt over FinTech startups focusing on lending—in particular, their blind growth and underwriting process.

Mulenga Agley, VP of Growth at Monese, commented on the viability of current approach, saying, "The whole landscape has changed. I tell you what doesn't work anymore, saying you'll build a massive customer base and you'll worry about monetizing later. People are very skeptical of that business model now. It's not worked many more times than it has."