/wholesale banking

News and resources on transaction banking, corporate banking and supply chain finance.
Half of European fintech lenders unlikely to ever hit profitability - WinYield

Half of European fintech lenders unlikely to ever hit profitability - WinYield

European fintech lending startups have racked up over €11 billion in debt facilities in 2023 but many are running unviable models and will never become profitable, claims a report from credit fund WinYield.

WinYield carried out 95 in-depth interviews and due diligence of 27 fintechs, finding what it calls "cracks" in their credit models and approach.

Less than 10% of the fintechs interviewed have staff with previous relevant credit experience. Common underwriting models are composed of a black box using basic regression analysis with no human overlay to assess the actual viability of loans.

WinYield says that in many cases delayed payments are running up to 10% of the entire fintech lenders' portfolio, this is four times higher than in bank SME portfolios. And, while the $12 billion in debt facilities is largely composed of senior debt, it's the €514 million venture capital that is at risk of disappearing which has first-loss exposure.

Many of the firms analysed will never become profitable, largely because marketing and operational costs were significantly underestimated while the market opportunity was dramatically overhyped, says the report.

Those that do become profitable will likely need to pivot several times and ultimately partner with a bank.

Fabricio Mercier, CEO, WinYield, says: "The VC funding drought has actually helped clean a lot of the malpractice in fintech lending, bringing European fintechs to their senses with a degree of discipline and rationality returning to their decision making. Now we are entering into the phase of Fintech 3.0, with more experienced founders doing more with less.

"Although there's still a lot of learning to be done, the fintech sector is reshaping for a better future. By getting serious and institutionalised, fintech will grow again, partnering with credit funds and banks."

Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 November, 2023, 10:32Be the first to give this comment the thumbs up 0 likes

The founding premise of neobanks was that traditional banks have a high cost structure due to their branches and that neobanks have a huge competitive advantage by eschewing physical presence. They didn't realize that traditional banks do a lot of selling in their branches. Lack of branch network coupled with a massive underestimation of digital customer acquisition costs, as this study has found, threatened the basic business model of neobanks. VC funding at nosebleed valuations during ZIRP floated a lot of neobanks' boats. It's only now during HIRP that we know how many neobanks were swimming naked all this while.