If there’s one constant for FinTechs in general, and crypto and buy now, pay later (BNPL) firms in particular, it’s this: volatility.
For the digital-first and digital-only firms seeking to change how banking is done and commerce is conducted, the regulatory gaze is tightening. Consumers’ tastes are changing. Inflation is roaring, which means it’s more expensive than ever to operate. At the same time, the capital markets are drying up, and funding is getting harder to come by.
For many of these firms — perhaps for all of them — the ways they make money today won’t necessarily be the ways they make money in the years (even months) ahead, according to Jim McCarthy, president of i2c.
Cryptocurrency remains a key example of the verticals grappling with pressures that seem to change daily. As McCarthy told Karen Webster, painting the crypto landscape as one that is marked by a homogenous set of services would be a mistake. We’re seeing, in the public and private markets, a flight to quality that separates the established names from the Celsius wallets of the world.
“It’s going to be tough going,” he said, for the time being, noting that “we’ve seen the Coinbase numbers.” Monthly transacting users slipped quarter over quarter, as did the value of the crypto holdings on that marquee platform’s balance sheet. But the company’s cash position remains strong (as management noted).
McCarthy told Webster that it is the pick-and-shovel plays that might prove the most viable firms amid this volatile climate. The infrastructure players are the ones that can work with regulators to standardize rails and work with banks to lay the groundwork for crypto even though the digital assets have yet to find anything near a ubiquitous use case … yet.
The innovators will thrive, and the handful of firms that are built around speculative concepts or frenzied trading (hoping that values will simply go up) will go the way of the dodo.
“Right now it’s a case of buyer beware,” he said of crypto, which as a payment method is counterintuitive because of the inherent lack of stability, “and you’ve got to go in knowing full well that there is no backstop — and you should not expect a backstop.”
There remains a critical lesson (especially for real-time payments) to be learned amid the fragmented, whipsaw crypto industry, said McCarthy.
And that lesson is that interoperability is key. We’re not there yet, but cryptos need to act as trusted IOUs between parties and need to be able to cross borders without friction in order to settle with speed and transparency. Big Tech firms like Facebook missed an opportunity here, he said.
FinTechs as Banks
Volatility is also changing the nature of traditional financial services; FinTechs are making inroads into territory traditionally owned by the banks. Along the way, the FinTechs are becoming even more bank-like. They’re offering transactional debit cards, for example, and gleaning interchange revenue, but they need more than that to fund additional services to their account holders (who in turn are fee-resistant).
That’s tough sledding given the fact that VCs are becoming ever more reluctant to fund these upstarts that desire some diversification. Debit interchange rules may be in flux too, which may or may not cap the revenues streams.
For FinTechs that may have offered free accounts to get customers in place but then have had to monetize those accounts, “they’ve got to service these consumers or lose them — the transactional model is only as good as the people transacting. Even modest fees are still fees.”
There’s a fine line to walk here, too, as cross-selling services and products can get these firms (traditional banks too) in trouble. The traditional banks have a built-in advantage versus the FinTechs, in that they have built-in compliance, and can compete on price in ways their less well-capitalized FinTech brethren cannot. The banks are especially well-positioned to weather the turning of the capital cycle and are less reliant on transactional revenues than FinTechs.
The FinTechs, however, can lean into some trends such as the continuing explosion in BNPL, but not without risk. The BNPL space is volatile, too, marked, as McCarthy said, by too many players and dwindling capital to fund them.
Seismic changes loom for BNPL, he said, as the CFPB investigates the industry, but the specter of unintended consequences looms, as it’s not clear just whom the agency is seeking to protect. “There’s a lack of understanding of just how the BNPL model works,” he said of the regulators. In fact, PYMNTS’ own research shows that BNPL users are prime and near prime users who tend to be pretty smart about their money.
As these pressures linger, he predicted that we’ll continue to see roll-ups and acquisitions in the BNPL arena, such as Block’s buy of Afterpay and banks continuing to get into the game. It’s incumbent on the BNPL players today to make sure they have the right data and data science teams in place to manage credit risk effectively. Looking ahead, he said, inflation remains firmly entrenched, and it will only get more painful in the months ahead as rate hikes continue to make debt more expensive.
But as savvy players build their brands and boost their footprints across the globe, he said, “you’ll always have players that weather the storm.”
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