BNPL, FinTech’s painful pivot to profitability

After a record year in 2021, the FinTech industry experienced a significant decline in 2022. High inflation, market volatility and recession fears caused investors to shift their focus from companies’ growth potential to their current profitability; a calculation many FinTechs struggle with. Consequently, once abundant venture capital funding disappeared and FinTech valuations cratered. The F-Prime FinTech Index – comprising 55 of the world’s most prominent FinTechs – fell 72% at the end of the year.

This downturn has hit FinTechs in the buy now, pay later (BNPL) space particularly hard. From Affirm to Zip, stock prices and valuations have fallen significantly across the industry, and mass layoffs have become the norm. The problem is that while BNPL was one of the fastest growing verticals in consumer finance during the covid-19 era, most providers were not – and still are not – profitable. Now that profitability is a priority, companies are changing course. But with rising interest rates, increased competition, regulatory uncertainty and economic headwinds, BNPL suppliers now face an uphill climb to profitability.

«FinTech Tracker®” explores the challenges BNPL suppliers face in turning a profit and potential ways to overcome these obstacles.

Around the FinTech Space

In early February, BNPL supplier Affirm announced layoffs of 500 employees, or nearly 19% of its workforce. Affirm’s CEO, Max Levchin, explained in a shareholder letter that the cuts came in response to the company hiring before it has the necessary revenue growth to support the team. Affirm reported disappointing results for the second quarter of 2023, with a net loss of $322.4 million, a significant increase from the previous year.

Redundancies are just one of the challenges for BNPL suppliers – they also face impending regulatory changes. For example, the UK government took steps in early February to establish BNPL regulations by launching a consultation on legislation to regulate the industry and give the Financial Conduct Authority (FCA) the power to oversee operators and their activity. Although the details are yet to be decided, the FCA is likely to impose mandatory reasonableness checks, fair marketing practices and a licensing regime.

For more on these and other stories, visit the Tracker’s News and Trends section.

An industry insider on profits and the need for fintech self-policing

At a time when BNPL suppliers are struggling to generate profits after years of growth-centricity, achieving profitability may seem like an impossible task. Many of the biggest companies in this area have yet to turn a profit or haven’t for several years. Profitability is not impossible, just difficult to achieve.

To get the Insider POV, we spoke to Charlie Youakim, CEO of Sezzle, about BNPL profitability and why introspection and hard decisions are needed to get there.

Exploring potential avenues towards BNPL profitability

BNPL firms can no longer afford to prioritize growth over profit. With investors becoming more risk-averse and economic headwinds threatening to dampen consumer spending, BNPL suppliers must chart a course towards sustainability and profitability. While there is no simple one-size-fits-all solution, there are avenues that BNPL firms can follow to improve their financial footing.

Naturally, the first thing FinTechs can do is cut costs and reduce expenses. For example, PayPal cut spending by $900 million in 2022 — a reduction expected to save $1.3 billion in 2023. Other firms, such as Australian-based Zip, are scaling back international operations to save money. In addition to cost cutting, FinTechs can explore partnerships and additional product offerings. BNPL remains popular with consumers – and traditional financial institutions, technology companies and other payment providers are interested in capitalizing on its popularity. This creates opportunities for white-label solutions and new products, which many partial payment companies are starting to roll out.

To learn more about the potential paths to profitability, read Tracker’s PYMNTS Intelligence.

About Tracker

«FinTech Tracker®“, a collaboration with Sezzleexamines the challenging landscape facing FinTechs and BNPL companies as they swing towards profitability.