Crunch-time is coming for fintech unicorns: boding ill for innovation and cooperation

There may be quite a number of broken horns and blood from baby unicorns washing away the hubris amid broken promises and inflated expectations.

In several posts I’ve tried to postulate a number of problems that arise and pressure ambitious founders into misbehaving.

The mentioned factors making founders inflate promises based on their ego, titillating penchant for flattery, adulation — turn them into snake-oil merchants, selling bold ideas that no longer connect with the harsh reality of real business . All these should be balanced out by strong founder team, good governance and senior advisory counsel.

Still, when the game is rigged, little helps. Mentors and thought leaders flaunt their knowledge, investors dance to the music even if they believe between themselves that certain models are broken or would take too long / forever to take off. Founders are buoyed by cheap liquidity and stark limelight to cast their outlandish offers.

Both sides participate in the vanity contest: banks frame IT investment as digital innovation, placating shareholders anxiety over disruptive models, bank executives order demonstration of meaningless platforms to show-off and buy-out, purchase time to stave off real meaningful changes: it is often culture that remains in organizations that invest in tech — and still fail.

Startups often misfire — and those that derail spectacularly, derail the global process of meaningful change. As all organized social changes — their require time, adoption and acceptance. Incumbents may be slow to change the backoffice since they don’t want to lose the trust of existing users and their solid balances: for startups it’s almost always a gamble with low balance / a zero sum game for starters. Devil lurks in the shadows and the more neoplayers stumble, the more scrupulously the incumbents study each new model.

And it is increasingly the case that it would be incumbents game to lose — since the common denominator in the game is scale — defined by stickiness of ones product and ability to onboard users en masse. CAC is the silent killer and the arbitrage dealer.

Neobanks are often started as e-money institutions, but users want deposit insurance — that EMI cannot provide. Zero remittance are subsidized by investor money or cheap debt. Incumbents on their side are overplaying with AI/ML vocabulary — using it where simple automation would do. They still fight for their independent profit centres, their purchasing functions are non-existent, the real value their swiss army services provide is diminishing by the day. Putting a new interface on top of a hodge-podge of disparate systems and calling them a neobank hardly qualifies.

Hence the need for new rules both sides need to develop: built around transparency, clarity of vision, separation of powers — and cross-cultural education.

Fintechs are single-minded creatures — built to see the world in the eyes of the user — and so having better chance of making a single product-channel experience (McLuhan is always present in this game), driving sticky usage, lower CAC and overall satisfaction. Banks still have these users, they control liquidity and ability to loan money — and possess innate mastery for compliance and reporting. These qualities would not go away.

Cases that should be dropped:

Framing: A great friend told me recently its often the case of banks framing the process around the desired visual outcome — and not delivering on substance. A multi-year process to build a virtual bank embellishes itself and rings hollow. A neobank is done, a licence is received but no one needs the product — yet banks report they have launched this app, tested this AI (even if there is no AI).

The illusion of success: the market is full of self-proclaimed thought leaders, influencers who command outlandish fees, can talk for hours on the miracles of blockchain for corporate banking but cannot field a simple deep domain question on whether advancements in quantum computing disrupts the ledger (hint — it does but a change in the hash function can alleviate the problem for the time being).

The founder figure: messiahs are strongly desired — by executives when they need someone to take entrepreneurial responsibility — they compensate for flaws in strategy when it fails, they serve great purposes as scapegoats for banks who fire them.

Recent news of Matthias leaving his long-time founded beginning — Fidor — is a good case: for him this is truly a deserved break from a bank that has misused his creation. For the bank, this is an asset that has not been properly understood when the DD was done, its promises oversold by a mysterious and charismatic founder — it’s impact limited or even considered negative.

The outtakes:

They are simple: the crunch-time is coming and it’s coming fast. News of malfeasance, numbers optimisation, overselling, growing district in LTV/CAC (growing to compensate for the growing CAC as neobanks burn the same institutional investor money to compete against each other) all contribute to increased scrutiny with how incumbents are viewing fintechs. There won’t be place for all to go global and be funded through capital markets or private pools — so hair-cuts will be done left and right.

Continuation of the “innovation theatre” bodes ill for the industry in terms of benchmarks and valuation approaches. To address this, both parties need to rationally dispel the doublespeak and input good sense in what real meaningful innovation is. It is no longer IT investment, and neither is discounting market-price with investor money, expecting the inflection of some random curve.

Regulation will change and I expect more stringent that more relaxed: Wirecard using 3rd party services that take the burden of touching those transactions that elite can’t touch. PSP companies setting their processing hubs in Dubai, taking benefit of “lax regulation around processing of certain transactions”. Funds being registered in bulk in “specialised jurisdictions”. Regulation regime can tilt and sandboxes will be swiftly dismantled as companies do not follow the light regulation and do not implement the full scope of required changes they should make.

Whether it is a planned relationship between a bank and a platform, a scheme and a neobank, a lender and a marketplace — there will be a lot more scrutiny. The difference of risk-based approaches from incumbent and fintechs perspective is what in part defines and enables the current cooperation regime — and this fragile balance can be broken.

Incumbents will call fintechs bluff more often — and it does not make life easier for both. There will be a penalty on innovation — just like fake news toxicity casts doubt on the light of reason.