Benzinga – The European VC market is in turmoil. The number of capital venture deals in Q1 2023 fell by 19.2%, while their value fell by a whopping 32.1% quarter-over-quarter to just under 12 billion Euros.
VCs can no longer enjoy the low-interest rate environment of the past decade, with the European Central Bank (ECB) increasing key interest rates by 1.25% in 2023, making raising capital more costly. Investors are becoming risk-averse as well. The first quarter of 2023 hit European VCs with dry powder shortages, leading to an 8-year funding rate low of just 3.4 billion EUR.
Where 2022’s fintech was considered one of the fastest-growing industries, its 2023 counterpart seems to suffer just as much as VCs. While the NASDAQ rose by 16.8% in Q1 2023, fintech stocks stayed flat, underperforming both the tech and finance sectors. Is the industry in decline, how and why is the sector turning from growth to profitability, and what does this indicate about the future?
Current Affairs And Valuations
The alarm bell for fintech rang when TriplePoint Venture Growth and Schroders marked down their stakes in Revolut, suggesting that the privately traded neobank giant lost between 15% to 46% in its value. Schroders also slashed the valuation of its holdings in Atom Bank by 31%. The public market mirrored those private equity concerns as the EV/NTM Revenue median multiplier decreased to 1.9x in March, compared to 2022’s annual of 4.2x. Projected revenues for 2024 were also reassessed at a lower value all over the sector.
Part of the market-specific reason for this decline is the extreme instability of the US regional banks. Although the post-SVB collapse period saw a 2% outflow of deposits from medium-sized banks — implying a net positive for fintech as an alternative to conventional banking — the real effect is double-edged. Most fintech companies don’t have a banking charter, so they use sweep accounts that automatically redistribute fintech deposits to a network of partner banks.
The issue lies in the fact that most members of this network are the same mid-sized banks with the same vulnerability to systemic banking crises. In late April, Cross River Bank — one of the largest banking partners for fintech firms — got an FDIC enforcement order over its lending practices.
As if it wasn’t enough, 2023 neobanks are now facing a fearsome newcomer in the form of tech giant Apple Inc. (NASDAQ: AAPL). It was easy to grow the customer base by offering high-yield savings accounts as the onboarding tool when the national average rates were at the extremely low rate of 0.39%. Now, fintechs have to compete with a 4.15% rate, backed by the reputation of a globally recognized and respected brand. While the offering is currently limited to the US, there is no certainty that European markets won’t be next.
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From Growth To Profitability: Strategizing For The Future
Investor sentiment has also undergone a shift. Now they demand profitability over revenue growth, and the fintech industry is well aware. This is seen from changes in financial performance, with Starling and Revolut already having hit annual profitability and Bunq reaching quarterly profits for Q4 2022. Those who face unavoidable losses resort to communication, like when the Danish bank Lunar raised additional capital in February with the goal of “shortening the path to profitability”, or when Monzo reported being on track to profitability by the end of 2023.
The combination of broader economic and financial situations, fintech valuations, and market-specific conditions of early 2023 represent a changing trend from growth to profitability. Investors no longer tolerate high burn rates for profitless growth. They want early traction and fiscal prudence.
Uncertainty in the banking system, as well as Apple’s daunting market entrance, favors abandoning extreme reliance on attracting deposits as well as a paradigm shift to diversification. What worked well for growth doesn’t for profitability, a notion backed by a McKinsey estimate for Western Europe which claims that daily banking costs to serve are almost two times higher than the revenue per holder.
A Shift To Super Apps
As for what the future holds, I believe more companies will be exploring new niches, especially SME banking and B2B services; as well as a realignment towards leveraging data to transform personalized super-apps. The resilience of the one-stop-shop model is demonstrated by Revolut, Wise, and recent M&A activity. Even in a bearish market, diversified companies with multi-vertical integration like Nuvei secure gigantic exit valuations.
One example of this new fintech strategy shift is WeBank: the Chinese behemoth leverages its user base for activities with more lucrative profit margins such as loans. The company also cuts costs by using machine learning and collected client data to calculate risk and create customer profiles, which in turn led to record low ratios of non-performing loans. The outcome was a 36% rise in revenue and a 39% jump in profit in 2021.
Expect to see more in the way of self-sufficient super-apps, as this is precisely the case study most fintech startups are eyeing right now.
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