The global financial crisis of 2008 had a profound impact on the economy, but it also gave rise to a thriving startup ecosystem. With central banks slashing interest rates to stimulate the economy, investors poured money into promising young tech companies. This created an environment that allowed fintechs to emerge and challenge traditional incumbents. However, as interest rates rise and macroeconomic conditions change, fintechs are now facing a reckoning.
Fintechs that survive the current challenges will be those that adapt to changing macroeconomic conditions and diversify their revenue streams. Building great software and offering a superior customer experience are key to driving growth and sustainability in the long term.
The Rise of Fintech
Fintech companies disrupted the financial industry by offering superior products and services to consumers. From challenger banks to digital wallets, these fintechs attracted customers with slick apps, low fees, and attractive rebates or interest rates. However, the sustainability of their business models in the long term was not always considered.
The Achilles’ Heel: Interchange Fees
Many fintech providers rely on interchange fees as their main source of revenue. These fees are paid to card issuers, payment networks, and banks when a consumer makes a purchase. While this revenue stream is capped as a percentage of transaction price, interest rates are not. As central banks raise interest rates in response to changing economic conditions, fintechs face the challenge of escalating borrowing costs.
The Lack of Flexibility
Unlike traditional financial institutions, many fintech startups lack product diversity and are heavily reliant on interchange fees. These startups may not have the same customer base or offer a wide range of services like established banks. Becoming a regulated bank is a lengthy and costly process, and many fintechs opt to partner with existing banks instead. However, this limits their ability to diversify their revenue streams.
The Difficult Road Ahead
Many fintech startups have built their business models based on the assumption of perpetual low interest rates and stable macroeconomic conditions. However, the reality is that inflation and interest rates are likely to remain high for years to come. Fintechs need to adapt by making hard decisions about customer incentives and expanding their product portfolios. By treating software as a core asset, fintechs can unlock new revenue models and pursue diversification.