The 2008 Global Financial Crisis, while being the most devastating economic upheaval since the Great Depression, paradoxically played a pivotal role in nurturing our flourishing startup ecosystem.
In response to the crisis, central banks worldwide drove interest rates nearly to zero, ushering in an era of easily accessible capital.
This transformation had two notable consequences. First, it encouraged investors to back promising (and often not-so-promising) tech startups. Second, it paved the way for business models that, under normal circumstances, would be deemed unsustainable.
One prime example of the latter can be found in the realm of fintech. Over the past decade, the fintech landscape has witnessed the rise of numerous challenger banks, e-money services, digital wallets, and more, as they wrestled market share from traditional incumbents.
These fintech innovators captivated consumers with sleek apps, minimal or no fees, and attractive incentives. However, few considered whether these fintech companies could maintain sound business fundamentals over the long haul or withstand broader macroeconomic shifts. At the time, such concerns seemed unnecessary.
Today, fintech stands at a crossroads. In the past two years, central banks have raised interest rates from their historic COVID-era lows to levels not seen in a generation. Consequently, the once-beloved fintech business models are now looking increasingly fragile.
The collapse of the house of cards appears inevitable.
Fintech’s Vulnerable Spot For many fintech providers, a substantial portion of their revenue hinges on interchange fees. These fees represent commissions paid to card issuers, payment networks, and banks whenever a consumer makes a purchase.
Numerous fintech companies rely on interchange fees to varying degrees, with these fees constituting a significant portion of their income. For instance, U.S. neobank Chime generated a staggering $600 million from interchange fees in 2020 alone. While consumers remain oblivious to interchanges, they serve as a financial lifeline for many fintech firms.