August 1, 2023
July 2, 2022
Adrian Escude
Fintech, BNPL, growth models and profitability in a change of cycle
The last 3 years have hit fintech companies hard, but is there such a thing as a sustainable way to make money long-term in this ever-changing sector
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mins. de lectura

Downfall à la dot-com bubble

The graphic below may look like it’s taken from a crypto chart, but it’s actually from well-known, international companies valued in billions of dollars… which have had a red P/L from their inception, in most of the cases.

The valuation according to the Fintech Index has dropped by 40.3% over the last three years, while the S&P 500 has gone up by 39.2%. Within the Fintech Index, payment companies account for almost 3 out of every 4 dollars listed, which include BNPL (Buy-now-pay-later) companies.

Why is the S&P outperforming this index?

Even if the international context does not help (the war in Eastern Europe, the rise of protectionist economic policies, the disruption of supply chains, higher inflation and interest rates…), this alone does not justify the loss of value of this sector. How come the S&P is outperforming the Finance Index?

Cheap money, change of cycle and reactions

The capital surplus from artificially low interest rates and aggressively expansionary monetary policies implemented since 2020 found their home in these kinds of companies, raising their price by almost 3 times their average valuation compared to 2019. The recent interventions by the Federal Reserve, raising interest rates and slowing down inflation by cutting off liquidity, have greatly affected the recipients of this “cheap money”.

There’s a recurring discourse about a recession on the horizon, and none of these fintechs have gone through a whole credit cycle”, said Val Greer, Chief Commercial Officer at Bread Financial. This change of cycle reflects on the lack of risk taken by investment funds and VCs overall, which represents a clear change of attitude compared to the last few years.

What was acceptable when it came to sales and growth expectations in the summer of 2021 has changed completely in April 2022”, says a Fast ex-employee, the one-click checkout payment startup that closed after spending $105 million dollars in just over a year, and barely making $600,000 in sales. Even with investors such as Stripe or Index Ventures, they didn’t even make it to the next funding round. A super fast rise and downfall.

Klarna, the Swedish BNPL company, laid off over 700 employees via a prerecorded video message, and shortly after raised $800 million after its valuation plunged around 85%. In 2021, the company doubled its losses to almost $500 million, and competitors such as Affirm or Zip are just behind Klarna when it comes to losses. 

Business models and growth

The priorities of these companies (and the investment funds that, well, fund them) change abruptly: they go from the need to grow at all costs, to the need to be profitable short-term.

This growth model, based on raising capital via big funding rounds to acquire a share in the market in an attempt to be profitable, is now in question due to the new economic cycle that is upon us. That’s part of the reason why it’s hard to find BNPL or even payment companies that are profitable and have a sustainable business model.

“The biggest question about the BNPL sector has always been the sustainability of its business model in an environment of more normalized interest rates”, said Fitch Ratings analyst Michael Taiano to Bloomberg.

Before this change of cycle, the market valued these types of companies with valuation multiples similar to the ones in a SaaS model, rather than a financial one. Why? The premise is that these sell to the store at a low cost with the goal of establishing direct relationships with the end consumer (that have acquired thanks to the store) that they capitalize on in different ways: cross-selling, affiliate programs, revolving cards, personal loans… Fully ignoring the middle-man and its main client: the store.

Considering the high acquisition cost of a new buyer and the low margins of most sectors, the fact that your payment provider sends your clients to your competition is something that you won’t be seeing in their pitch decks. They promise client acquisition, but they skip the part where they steal recurrence and potential loyal customers.

“The next 12-18 months will be the moment for fintechs to center around profitability by reducing costs, increasing sales and optimizing business models,” said Rob Straathof, Liberis CEO, for Verdict. 

Here you have a rare sight of fintechs asking for a new round during the second semester of 2023. 

Do payment fintechs really make money?

Funnily enough, I’m writing this blog post while working in a payment fintech… Actually, one of the reasons why I joined seQura, the leading BNPL company in Spain, is because of its growth and financing models, completely opposite to similar companies, which hasn’t been an obstacle to grow 100% CAGR over the last 5 years.

SeQura is a private Spanish company, without VC funding behind it, where its funding partners have a majority stake in the company, which has been profitable since 2017. Long-term vision, the freedom that comes with a company not tied to risk capital, and a truly innovative culture are key assets that help seQura thrive.

With the mission to be the best partner to each merchant, seQura develops payments solutions that adapt to the different business profiles and shoppers. From installment payments (interest-free and up to 36 months), to deferred payments and leasing models for consumer goods (electronics, optics…), it’s present in more than 15 sectors for purchases ranging from €30 to €4,000.

With this premise, seQura’s model doesn’t follow too-common practices in the industry such as cross-selling or usage of shoppers’ personal information to sell third party products. 

Can you be competitive without using all these (mal)practices? In this context of a change of cycle and economic recessions, these were the results of our 2022 Q1:

  • 57% increase in merchants, to over 4.000
  • 30% increase in shoppers
  • 35% increase in sales
  • 85% EBITDA increase, to €3 million
  • NPS of 87%, almost three times higher than traditional banks

It looks like you can compete (and win) doing things differently. After all, in this sector, true unicorns may just be the ones that aren’t in the red.