(4) Which concepts and products are struggling?
Marc Rubinstein made a great comment recently that "There is no mechanism for pessimists to express their view in private markets." Similarly, while it’s easy to divine from press releases and celebratory Tweets which products are working well in fintech, it’s less transparent which ones are struggling. KPIs are hard to come by publicly, and product wind-downs are normally quiet affairs.
We should continue to cheer for fintech entrepreneurs, who take risks to bring new services to the market. In an ideal world, every fintech product would find some form of success. But in a world where product failures happen, it is important to glean insights so that we can build more resiliently.
We tracked a few wind-downs and consumer finance closures in Q2 2020:
Bank retail branch closures have long been a trend in consumer finance. The pandemic has acted as an accelerant, and Kearney now predicts that up to one in four branches will close in Europe (with likely comparable US numbers).
Declines of cash withdrawals in the UK due to the pandemic threatened its ATM infrastructure with the danger of collapse due to the system’s operating costs.
India’s Icici Bank - one of the more tech-forward Indian banks - and Apollo Global ended the joint credit venture they started in 2011, because the asset manager plans to start its own credit investment business.
Kendu, the investment app launched by Dutch bank ABN Amro, failed to gain sufficient traction with customers and was shuttered in June.
Marcus UK closed its 1.5% APY savings account to new customers and lowered APYs to 1.05%, but this was mostly a success story driven by the bank’s ability to attract $21 billion in deposits against a $25 billion regulatory limit.
Motif, a social investing and portfolio management platform, shut its doors and sold off assets to Folio Financial in April, which then turned around and sold itself to Goldman.
Scalefactor, a company that launched an automated back-office (bookkeeping, accounting, payroll) platform, wound down in June and returned capital to investors. The company blamed difficulties associated with the pandemic, though many speculated that most of their processes were still run as manual services, leading to runaway costs.
But what signals, if any, can be drawn from these examples? Likely few. Branch-based consumer finance businesses are expensive to maintain. I expect to see a continued shift to digital and agent-model (think, Walmart kiosk) banking services. Bank-built PFMs and investing apps don’t seem to win customers away from fintech options (remember Finn?), with Goldman’s Marcus offerings the notable exception.
The pandemic may provide more clarity as economic stressors squeeze margins at some types of consumer fintechs. Already, Q3 featured valuation write-downs and underwater financials from generalist lenders and neobanks, which we’ll cover in Q4. In particular, we’ll dive more deeply into the CAC, LTVs, and unit economics of these businesses to understand in which situations they can thrive, and in which it is likely for them to struggle.
