GGV Capital U.S.—Amidst a year of macroeconomic headwinds, we’ve admired the resilience of the fintech industry and remain bullish on the next decade in fintech. Faced with higher interest rates, softened demand, and sharp valuation corrections, we’ve been inspired by fintech founders’ impressive stamina and fortitude in continuing to grow topline and making progress on profitability.
The fintech industry has continued to achieve strong fundamentals, evidenced by publicly traded fintechs adding $20B of revenue and $7B of gross profit since 2021 and more than half of public fintechs projecting to be profitable in the next 12 months (up from 25% today).*
Markets move in cycles, and perceptions change quickly—it's important to remain hopeful by recognizing the impressive progress made to date, and grounded by focusing on the long-term opportunity for value creation in fintech.
The current market environment is the toughest we’ve witnessed in a long time. Every decade has a defining macroeconomic headwind: the 1970s were marked by stagflation, the 1980s by the Savings and Loan Crisis, the 1990s by financial crises in Asia and Russia and the dotcom bubble, and the 2000s by the Global Financial Crisis.
We’re experiencing this decade’s defining headwind, which was first marked by the COVID-19 fallout and now by the rapid rate hikes by the Federal Reserve to combat inflation. While the current macro has its unique causes and effects, we try to place the difficulties faced today within a broader historical context and believe in the recovery ahead.
To get a pulse on the current state of fintech, we asked Embedded Fintech 50 (EF50) founders and CEOs** about their top priorities for 2024 and compared it to investors’ views on the macro outlook. We learned that:
Recognizing this discrepancy, we wanted to share some suggestions for founders and board members to consider as you make 2024 plans.
Over the past year meeting with and investing in impressive fintech companies, we’ve observed that at a high level, fintechs are leaning into software automation and in-house infrastructure to enhance the provision of financial services. In line with our prediction from 10 months ago, we’ve seen continued strong adoption of financial operating systems as well as the embedded fintech solutions that power enterprise backends.
There are advantages to both approaches:
Within these two themes, we’re excited about “Office of CFO” software as well as next-generation ledgering and accounting systems.
More tangibly, we wanted to share some product strategies we’ve observed to be successful at sustaining rapid topline growth and progressing toward profitability despite macro headwinds. We hope these can serve as inspiration to sharpen your approach:
In today’s environment, customers are more sensitive to interest rates, and lenders are more sensitive to delinquency risk.
Collateralized loans—backed by deposits, home, auto, stocks, or more—are a great way to strike credit partnerships, lower your cost of capital, and then pass on lower interest rates to consumers.
We’ve seen fintechs offering secured credit halve their cost of capital with lenders to obtain SOFR + 3%-5% vs. SOFR + 8%-10% on credit facilities for unsecured loans.
By halving your cost of capital, you can pass on structurally lower interest rates (i.e. 12% APY vs. 20%+ APY) while still maintaining your spread/NIM.
As B2C and B2B fintechs evolve from point solutions into platforms with several financial offerings, many find themselves holding customer funds in checking/saving accounts, treasury accounts, mobile wallets, and other vehicles.
Investing customer funds in risk-free, liquid T-Bills is a good way to earn passive, high-margin income. (More on this below.)
Since the Silicon Valley Bank fallout, most large banking institutions’ savings accounts (i.e. Bank of America, Chase, Wells Fargo) continue to offer near 0% interest rates as the price to pay for the safety of deposits.
While the market standard is to not pass back interest on deposits, you can pass back interest on customers’ deposits and earn interest revenue up to the current risk-free T-Bill rate of ~5%.
After raising larger amounts of capital (typically $25M+), we’ve seen fintechs partner with treasury solutions to earn passive income on balance sheet cash that can extend cash runway by several months.
Functionally, it works like this:
Leveraging treasury management solutions is important to optimize cash on your balance sheet, especially in a higher interest-rate environment.
Over the past year, B2B fintechs with predominantly sales-led-growth (SLG) motion have faced longer sales cycles, decreased win rates, and lower quota attainment throughout 2023.
Several B2B fintechs have introduced self-serve onboarding functionality accessible directly via the website, with new, lower pricing tiers, enabling them to capture surplus value of customers and generate qualified leads for the fuller software.
The “lite” software approach has been effective at improving sales efficiency by weighting the sales team more heavily on account executives (AEs) who spend time pursuing and closing qualified leads.
It can be easier to convert customers from a “lite” version to a full subscription as the user has already demonstrated interest in the product.
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Further, we tapped our Embedded Fintech 50 community for their insights on go-to-market strategies. Here are some of the priorities they’re discussing internally:
Streamlining customer acquisition: For example, within the spectrum of small and medium-sized businesses (SMBs), what size and industry should we go after? Among consumers, what demographic, income-level, and creditworthiness makes most sense to acquire?
Differentiating distribution channels: Partnerships with businesses selling adjacent products, for example, are highly effective at lowering CAC.
Reactivating users: Instead of purely focusing on acquiring net new customers, harvest existing ones.
Several of the fintechs we’ve spoken to have mapped out gaps in their offering and allocated internal resources in 2023 to building products that reach feature parity with incumbents and direct competitors—and then building more to create a best-in-class product that wins customers away from others and effectively retains them.
As fintechs think about a path to IPO, it is important to note the marked difference in software vs. transaction-based multiples—financial software trades at 10x revenue multiples, whereas transaction-based fintechs trade at 5x revenue multiples. We’ve also noticed a few patterns emerge:
As we look ahead to 2024, we encourage you to keep your eye on the prize. We believe the long-term tides are in fintech’s favor as the industry’s revenue continues to grow and market share is increasingly captured by disruptors. The insufficiency of risk management systems and financial software that precipitated the banking crisis from this past February underscored how a lot of infrastructure that underpins our financial system is from a legacy era and in desperate need of upgrading.
Sharing tactics and best practices can help each other best navigate the current headwinds and overcome challenges along the way. Over the next decade, there are a lot of solutions to be built in fintech, and we’re here to do what we can to help founders to build and scale them.
*Capital IQ analysis compiled from 56 largest publicly traded fintechs
**Methodology for GGV’s Embedded Fintech 50 community pulse survey, Oct. 2023:
