Do Fintechs need to earn money and when does it matter? Here’s a quick cheat sheet
1st June 2022
If there’s one sure-fire rule in business, it’s that for-profit organizations need to be, well, profitable. Fintechs too. But do they really? Here’s my take on earning money in the fintech domain and when it’s ok not to.
How pockets of growth get …empty
This year’s Frankfurt Digital Finance inspired me to look closer at fintechs and profitability. If you were listening to Ali Niknam, CEO at Bunq, and Dr Jan Kemper, COO and CFO at N26, discussing the need for fintechs to be profitable, you were probably thinking: “Aren’t all companies supposed to earn money in the first place?” It turns out that it’s not quite that simple.
When we examine some of the top European fintechs, profitability seems to be a major challenge. Revolut, the most valuable UK fintech, has reported a $217 million loss in 2020, which is 57% higher than the previous year. Klarna — similar story: the buy now, pay later (BNPL) giant reported significant losses in 2020 and 2019, after a few years of moderate profitability. Monzo, N26, and Starling Bank are in the same boat, reporting significant year-to-year losses. If we look outside Europe, the pattern repeats itself with NuBank’s $230 million losses in 2020. And yet, all those fintechs have one thing in common — they’re highly valued by the market.
It seems we’re easily wowed by fintech’s promising potential and tend to overlook major profitability issues. Amazon has probably played a huge role in creating and fostering this mindset, since the company wasn’t making money for quite some time as well. Should we be concerned about this? Is short-term lack of profitability a problem? Let’s look at this from a couple of angles and try to paint a clearer picture.
Clearly defined strategies
It is definitely easier to trust long-term company plans when there is a strategy behind them. It allows, even on the basic level, to see whether a company is actually progressing in the direction they first envisioned.
Not all fintechs publish their strategies, but if they do they’re worth checking. Revolut is pretty transparent about their mission: they’re there “to build the world’s first truly global financial services superapp.” Big ambitions are also a domain of N26: “We have re-designed banking for the smartphone, not just developed another interface. Every feature or product is available with only one click directly in the N26 app. All processes … take place in real-time.”
Those are pretty convincing messages that can be put right next to concerns about short-term losses. When your plan is to build something that big, you are bound to experience some temporary hiccups.
Mixed sources of revenue
It is usually helpful when a company can count on many sources of revenue. Once again, Revolut is building a super finance app that offers services ranging from FX to crypto investments. They also opened up services for business customers which expanded their B2C offer. Considering how they started, with cheap FX positioning, it is quite astonishing that they currently have three pillars of revenue — card and interchange, foreign exchange, and subscriptions. Another interesting example is Starling Bank and their expansion with their bank-as-a-service offering.
This growth in several directions looks like a good recipe for healthy profitability in the near future.
Active and engaged customers
Boasting about the growing number of users or soaring app downloads is usually cool marketing, but one needs to remember that there might be no story behind the stats. Companies often show us part of the picture (and not necessarily the one we should be focusing on!) Best piece of advice: Don’t look for a growing portfolio — search for a valuable one. Are customers active users? How often do they return to the app? Do they grow their interest in fintech services by using more products or using them more often?
Klarna is a good example here. They provide insights into how the number of transactions per customer grows each year (data is provided for the Swedish market only). Nevertheless, that metric is certainly a good sign of engagement that is built over time and points towards a sustainable business model.
Monzo uses their own “main bank” metric as an indicator of engagement. The metric brings together all customers that meet their qualifying criteria — those are pay in at least £500 every 35 days to a Monzo account and have at least one active direct debit on that same account, get a pension payment into a Monzo account every 35 days, get a student loan paid into a Monzo account every eight months, or share a Monzo joint account with someone who does one of the above.
So far, 18% of customers meet the criteria. However, considering how it is relatively easy to meet them, it raises questions about whether those customers are really engaged. I’m more in favor of Monzo’s claim that their customers have an average of 28 friends using the app. There is potential here to grow the portfolio but let’s not forget — it must be an engaged one.
Global business or global presence
One of the promises of neobanks and fintechs is that they can operate everywhere. Scaling up a business is easier thanks to digital channels — mostly mobile — and global accessibility increases usage. However, it is definitely easier said than done.
Revolut is trying to build the world’s first global financial superapp, but as much as 88% of its revenue comes from the UK market, on which they are very competitive in pricing. The same narrative applies to N26 that discontinued their US operations. The numbers clearly show that fintechs have a hard time gaining more traction in new markets. This is something that might be a major blocker for long-term profitability.
Predictable company performance
“If you stop marketing at all, will your company last?” – this is one of the questions investors like to ask fintech owners according to the conference speakers. Predictability is an important feature of business models, so putting a lot of focus on it seems necessary.
According to N26 financial results, their subscription business was the strongest revenue stream in the 2020 financial year, accounting for 45% of total commission income (€43.9 million). This is a clear sign that the company is heading towards stable, repeatable income. And that can be built around active and engaged customers, which is the case here. The bank increased customer activity substantially, with transaction volume reaching €50.3 billion in the 2020 financial year (prior year: €32 billion).
In a similar fashion, Monzo launched subscription products in 2020 (Monzo Plus, Monzo Premium, and Monzo Business Pro) that now have 200k+ subscribers. The number might not be very encouraging at this point, but the direction is clear.
Do fintechs need to earn money? If temporary profitability issues keep you up at night, think about the five areas I mentioned. Answering questions around those topics should prove useful when assessing business sustainability, overall health, and scalability potential.
Are any of the points especially important? I would see the above as a checklist. The more points a fintech can get, the less worried I would be.
And honestly, there’s only one big question that we must keep on asking: What is currently being done by the company — whether fintech or not — to improve profitability? If I can’t find any strategic initiatives addressing this topic, I’d start to worry.