Winter Is Here: So How Can B2C Fintechs Stay Warm?

It’s a turbulent time for most industries and for fintech in particular. Rising interest rates have seen fundraising decline. A gloomy economic and geopolitical outlook are adding to the uncertainty. The impact has been, and will continue to be, huge. In 2021, the industry was riding high: a fifth of venture capital went into fintech, much of it into business-to-consumer startups. Now we’re caught in a crunch.

Growth (at any price) is no longer in the driver’s seat, not even riding shotgun. Profitability has its hands on the steering wheel and is driving quickly toward debt financing and cost cutting.

The numbers involved are huge. In one year, the 10 largest publicly traded fintech firms lost $850 billion in value, according to The Economist. Fewer private firms are graduating into unicorn territory. It seems like the bigger the valuation, the steeper the discount has been. Winter is beginning to bite.

Sign Of The Times

For a clear demonstration of the hazards facing once-bold B2C disruptors, look no further than Klarna, the company at the forefront of buy now, pay later services. Klarna’s main Swedish business is shedding staff, as its valuation shrunk to a fraction of its previous high. Klarna’s Australian business is tilting even more precariously, its revenues collapsing by 71% year on year, even as its marketing and advertising budget doubled.

Klarna isn’t alone. Many firms are still working out where to make cuts, before it’s too late. We’ve seen big names like Chime, Robinhood and Freetrade making large cuts to head count. Others have cut back their growth ambitions, with N26 pulling out of the U.S. market. Enthusiastic customer acquisition was once the road to success—but in an economic downturn, that expansion is being hastily pruned back.

Green Shoots

Amid the doom and gloom, however, there is cause for optimism. As cheap financing has become history, the race to reach sustainable growth will be crucial. Many will not make it. Yet it’s these periods of adversity that will also highlight the B2C fintech firms with strong foundations. As Warren Buffett put it: “You don’t find out who’s been swimming naked until the tide goes out.”

For those companies that have a real product-market fit, strong management, high team spirit and 12 months of financial runway, the future may actually have never been brighter.

Long gone are the days of artificial competition: players selling services way below cost, dumping offers into the market they never would be able to fulfill, making life hard for those that believe profitability is still cool.

Not only has recent years’ easy access to cheap money driven down margins, but at the same time, it has driven up costs. The cost to access talent and markets skyrocketed, in tandem with increased competition fueled by free money. Resumes exchanged hands as if they were gold certificates, and marketing spending took place as if it was a means in itself: the more, the better. ROI seemed to be shortened to only “I.”

Wider economic tightening will push more firms toward digitization and streamlining their offerings. Those underlying, long-term needs that B2C fintech firms set out to address still exist and will only grow going forward. So fintech will still be kept warm by fresh capital injections, as VC investors search for smart investments. And I believe that fintech is still a smart investment. Particularly for B2C firms, this could end up being a cloud with a silver lining.

Embedded finance allows companies to build and deploy new products at speed, while changing consumer attitudes to their money represent new opportunities.

Recessions put money management front of mind. For an industry built on innovation, a new frontier has appeared, a new challenge to take on. Few industries are better equipped to capitalize on that.

There are plenty more obstacles to come. With supply chains in disarray and an energy crisis likely to worsen, there are no silver bullets. Yet despite the hard times, this is still an industry with plenty of energy, talent and creativity. So although winter is a good time to hunker down, consolidate and plan for the thaw, it will have its winners, too.

How Winning Firms Will Differentiate Themselves

These winners will be the ones who do a few things really well. They will know that investment for the long haul trumps the short, without neglecting the focus on near-time profitability. They will have the insight to understand the changing needs of their users as well as their investors and adapt their offerings to the opportunities of their markets.

Winter is a necessary counterbalance. Good times can breed complacency. Easy money can slacken financial discipline. In some ways, this winter is long overdue.

The music might have stopped, but the beat within is still pumping. Looking at the bigger picture, there’s good news for our industry and a positive outlook on the horizon.

Originally published at Forbes.

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