It was March 1999 when Priceline, a travel booking site and the poster child of the dot-com era, went public at $16 a share. On its first day, it reached a market capitalisation of $9.8 billion, the largest first-day valuation of an internet company at that time. By April 2000, it lost 94% of the value. Priceline was one of the biggest names of the dot-com bubble whose burst signalled the spectacular rise and fall of the early internet companies.

Analysts argue that while this first generation of internet companies promised to deliver new ways of working and transform the future of business (does that sound familiar?), they displayed a clear lack of interest in profits, often generating losses and investing in branding on a grand scale.

Fast forward to 2019, Maximilian Tayenthal, CEO of German online bank N26, stated: “In all honesty, profitability is not one of our core metrics.” Instead, the focus for many contemporary fintechs is on driving user growth with a view to becoming profitable at some point in the future, but until then raising money from private investors.

Will the bubble burst yet again?

The coronavirus effect

There are reasons to believe that the fintech industry is in it for the long term, pursuing economic viability and business model sustainability. It was actually the Covid-19 pandemic that provided an additional impetus for fintech companies to prioritise profitability because of dwindling investment.

According to McKinsey, venture capital funding has slowed, dropping by 11% globally and 30% in Europe in the first half of 2020. While some fintech companies who raised funds before this decline may still be in a strong position, McKinsey predicted further downward pressure on valuations and emphasised the need for companies to expand their revenue streams to achieve profitability.

Between a rock and a hard place

One of the main challenges for digital banks is to encourage their customer base to start using their accounts as their primary or exclusive banking accounts, and to increase the number of products used. On average, customers at digital banks hold 1.5 products, compared to five for traditional banks.

Some experts say that traditional banks have the advantage of trust, particularly when it comes to important financial products such as mortgages, while people use challenger digital banks for travel and discretionary spending, both of which have suffered during the pandemic.

However, there are emerging spring shoots of optimism regarding fintechs companies’ quest for long-term profitability. Starling has been profitable since October 2020 and Monzo said its revenues are 30% higher than before the pandemic, with more customers using Monzo as their main account.

Clear as mud?

Perhaps some clarity on the future of fintech can be found in history again. 2001 was (despite some predictions) not the end of internet. In fact, despite many of the big dot-com names disappearing entirely, the investments made at the time built a significant part of the fibre optic cabling that helped the internet mature in the following two decades.

We don’t know what shape fintech will ultimately take, or who the main winners or losers will be, but we can be sure it’s here to stay, driven by shifting consumer expectations and their ever-greater preference for digital financial services.

If you wish to learn more about Wildfire’s fintech credentials, get in touch.

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