For years, financial technology (fintech) was one of the hottest investment areas, with companies promising to disrupt traditional banking forever. Investors poured money into firms focused on rapid user growth, often ignoring massive losses. The party has since ended. With higher interest rates and a more skeptical market, the new mantra for fintech is profitability. The companies that can demonstrate a sustainable business model are the ones that will survive and thrive.
The End of “Growth at Any Cost”
The old fintech playbook was simple: acquire as many users as possible, as quickly as possible, using venture capital to subsidize costs. Companies like Block (SQ) with its Cash App and PayPal (PYPL) with Venmo have become household names. However, the market is no longer impressed by user numbers alone. Investors now want to see if those users can be monetized effectively to generate real, consistent profits.
A More Challenging Environment
Higher interest rates have created a double-whammy for fintechs. First, it makes it more expensive for them to raise capital to fund their operations. Second, it makes traditional bank savings accounts more attractive, providing real competition for fintech apps that offer low-yield accounts. This tougher macro-environment is distinguishing between strong and weak business models.
The Power of a Diverse Ecosystem
The fintechs that are performing best are those that have built a diverse ecosystem of services. Block, for example, not only has the consumer-facing Cash App but also a robust ecosystem of payment and software tools for small businesses (formerly Square). This diversification creates multiple revenue streams, making their platform stickier for both consumers and merchants.
The ‘Buy Now, Pay Later’ Reckoning
The “Buy Now, Pay Later” (BNPL) space, once a red-hot area of fintech, is facing a serious test. Companies like Affirm (AFRM) saw explosive growth when interest rates were zero. However, they now face rising funding costs and the potential for higher consumer defaults in a weaker economy. The long-term viability of the standalone BNPL model is being questioned, and investors are demanding a clear path to profitability.
What Investors Should Demand
If you’re considering investing in fintech, your focus should be squarely on the financials. Is the company generating positive net income? Is its free cash flow growing? Look for companies that are reducing their reliance on stock-based compensation and are demonstrating operating leverage, meaning their profits are growing faster than their revenues. The era of believing in a story is over; now, the numbers have to back it up.
Conclusion
The fintech revolution is not over, but it has entered a more mature and challenging phase. A disciplined march toward profitability has replaced the “land grab” for users. Investors should be highly selective, focusing only on companies that have a proven, resilient business model and a clear ability to generate sustainable profits.
