Fintech startups have been massively successful over the past few years. The biggest consumer startups managed to attract millions — sometimes even tens of millions — of users and have raised some of the biggest funding rounds in late-stage venture capital. That’s why they’ve also reached incredible valuations.
And yet, this year’s economic downturn has been a challenge for the current class of fintech startups: Some have grown nicely, while others have struggled, but the vast majority of them have changed their focus.
Instead of focusing on growth at all costs, fintech startups have been drawing a path to profitability. It doesn’t mean that they’ll have a positive bottom line at the end of 2020. But they’ve laid out the core products that will secure those startups over the long term.
Consumer fintech startups are focusing on product first, growth second
Usage of consumer products vary greatly with its users. And when you’re growing rapidly, supporting growth and opening new markets require a ton of effort. You have to onboard new employees constantly and your focus is split between product and corporate organization.
Lydia is the leading peer-to-peer payments app in France. It has four million users in Europe with most of them in its home country. For the past few years, the startup has been growing rapidly; engagement drives user signups, which drives engagement.
But what do you do when users stop using your product? “In April, the number of transactions was down 70%,” said Lydia co-founder and CEO Cyril Chiche in a phone interview.
“As for usage, it was obviously very quiet during some months and euphoric during other months,” he said. Overall, Lydia grew its user base by 50% in 2020 compared to 2019. When France wasn’t experiencing a lockdown or a curfew, the company beat its all-time high records across various metrics.
“In 2019, we grew all year long. In 2020, we’ve had very good growth numbers overall — but it should have been amazingly good during a normal year, without the month of March, April, May, November.” Chiche said.
In March and early April, Chiche didn’t know whether users would come back and send money using Lydia. Back in January, the company raised money from Tencent, the company behind WeChat Pay. “Tencent was ahead of us in China when it comes to lockdown,” Chiche said.
On April 30, during a board meeting, Tencent listed Lydia’s priorities for the rest of the year: Ship as many product updates as possible, keep an eye on their burn rate without firing people and prioritize product updates to reflect what people want.
“We’ve worked hard and shipped everything related to card payments, contactless mobile payments and virtual cards. It reflected the huge boost in contactless and e-commerce transactions,” Chiche said.
And it also repositioned the company’s trajectory to reach profitability more quickly. “The next step is bringing Lydia to profitability and it’s something that has always been important for us,” Chiche said.
Mobile payment app Lydia raises $45 million round led by Tencent
Let’s list the most frequent revenue sources for consumer fintech startups such as challenger banks, peer-to-peer payment apps and stock-trading apps can be divided into three cohorts:
Debit cards
First, many companies hand customers a debit card when they create an account. Sometimes, it’s just a virtual card that they can use with Apple Pay or Google Pay. While there are some fees involved with card issuance, it also represents a revenue stream.
When people pay with their card, Visa or Mastercard takes a cut of each transaction. They return a portion to the financial company that issued the card. Those interchange fees are ridiculously small and often represent a few cents. But they can add up when you have millions of users actively using your cards to transfer money out of their accounts.
Paid financial products
Many fintech companies, such as Revolut and Ant Group’s Alipay, are developing superapps to serve as financial hubs that cover all your needs. Popular superapps include Grab, Gojek and WeChat.
In some cases, they have their own paid products. But in most cases, they partner with specialized fintech companies to provide additional services. Sometimes, they are perfectly integrated in the app. For instance, this year, PayPal has partnered with Paxos so that you can buy and sell cryptocurrencies from their apps. PayPal doesn’t run a cryptocurrency exchange, it takes a cut on fees.
Subscriptions
And finally, the most promising revenue stream comes from subscriptions. Ultimately, consumer fintech startups are software-as-a-service companies that have freemium offerings with limited features and paid tiers that unlock more functionality.
Robinhood wants you to pay for Robinhood Gold; Monzo is betting on Monzo Plus and Monzo Premium; Curve wants customers to upgrade to Curve Black and Curve Premium.
It’s been working relatively well as a significant portion of users are willing to pay a monthly fee to access more services, get travel insurance, pay less in small transactional fees, receive a cool card and other benefits.
Subscription revenue is reliable and predictable. When transaction volume declines, customers continue to pay for their subscriptions. And due to inertia, a lockdown has a limited effect on churn. Valentin Stalf, co-founder and CEO of Berlin-based challenger bank N26, told me that subscriptions have been “quite stable” during the first lockdown in Europe.
And you can see that fintech startups really care about their subscriptions, as they’re constantly tweaking them. For instance, Monzo introduced Monzo Plus because people aren’t traveling as much in 2020. They can’t upsell customers based on travel insurance alone anymore.
Monzo is focusing on software features for its new premium tier. For instance, customers can subscribe to Monzo Plus to aggregate third-party bank accounts or create virtual cards.
But Monzo has been late with its premium subscriptions. The company had to raise a down round, lay off some employees and find a new CEO. According to TechCrunch’s Steve O’Hear, Monzo now has 100,000 paid customers and five million users in total.
Last month, N26 introduced a midtier plan called N26 Smart. Once again, this subscription tier doesn’t focus on travel as much. Interestingly, the company now plans to change its free tier as well, which should have some effects on the subscription mix.
Keeping some features behind a paywall instantly improves the bottom line; the most loyal free users will switch to paid subscriptions, and casual free users will stop using your product, which reduces recurring costs.
Lydia recently replaced its premium plan. Previously, customers could pay €2.99 per month and a one-time fee of €5 to receive a debit card and unlock premium features. Now, they can pay €4.90 per month for premium features and the debit card is included. There’s also a new super premium tier at €7.90 per month.
“We didn’t really want to move upmarket. We’re like everyone else, we learn, we look around, we estimate how much it costs. And then we try to find the right price to make money on each subscription,” Chiche said.
We’re at the beginning of this transition phase that focuses on revenue. Consumer fintech startups have begun switching their subscription offering during the last couple of months of 2020.
It’s going to take a while to find the right balance between free and paid features. You don’t want to alienate your users as they’ve been actively using your product because some features were free. You also don’t want to become too greedy as it could have some consequences on growth.
After this transition phase, we’ll know more about the true winners in consumer fintech startups — those that can survive the monetization cliff.
A year of growth and opportunities for some B2B startups
2020 has been a completely different year for B2B startups in the fintech space. Stripe has been leading the way with a $600 million funding round in April. Rumor has it that the company is currently raising at a $100 billion valuation.
In other words, things are going great at Stripe. While local restaurants and bars might be going through their toughest year, e-commerce and online payments are doing just fine.
Similarly, Affirm filed to go public and its economics are quite telling. Affirm lets customers pay for something expensive in multiple installments — Peloton represents around a third of the company’s total revenue.
Even though people are staying at home a lot this year, some highly paid people are willing to spend money on indoor equipment. And Affirm benefits from this trend.
Inside Affirm’s IPO filing: A look at its economics, profits and revenue concentration
“During the first three months of the year, the only thing that happened is that it was a completely flat quarter. We generated as much revenue in January-February-March even though we should have grown,” Checkout.com founder and CEO Guillaume Pousaz told me.
Checkout.com is an online payments company focused on big merchants. Due to long contract negotiations processes, there’s a lot of inertia in the company’s revenue. Pousaz always tries to estimate the company’s revenue for the next year, just like a public company.
And his company managed to raise another $150 million this year at a $5.5 billion valuation. Is it completely business as usual? “The only clients who have yet to recover in our portfolio are travel companies — they are generating 25% to 30% in volume compared to before,” Pousaz said.
Checkout.com, the UK payments startup, raises another $150M, now valued at $5.5B
When asked about optimizing the company for profitability, Checkout.com is an odd company as the company is “still profitable,” Pousaz said. “At the group level, we are profitable, we don’t generate $50 million in EBITDA, far from it. But we generate double-digit million dollars,” he added.
Checkout.com also works with a ton of other fintech companies. For instance, a hundred online remittance companies rely on Checkout.com to process card payments. And Pousaz has also noticed that fintech companies have been optimizing for profitability.
“I don’t know if they’re focusing less on growth, I think it’s just a reality check. Profitability, or discipline rather, it’s coming from your investors,” Pousaz said.
“A lot of companies have deployed their capital well. They are going to have better unit economics when they go back to normal. In fintech specifically, I think people realized that this year wasn’t a growth year and that it was useless to burn money on growth. So they made a lot of efforts on restructuration and it must have consolidated many businesses for the coming years,” he added.
After a few wild years of growth, fintech startups are starting to act more like traditional finance companies. They tend to focus on forecasting, unit economics and burn rate.
While it was bound to happen at some point, nobody expected a shift in 2020. Next year, fintech companies will compete more directly with legacy banks and old financial institutions. Let’s see if they become better at financial products before financial companies become better at tech.
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