The 2008 financial crisis made the central bank of the US do something very unthinkable. It had slashed the interest rate to zero. The organization justified the reason behind this dramatic choice being the need to revive the economy. The results went far and wide to every imaginable corner of the world. It was as if the world economy had received a booster. The historical move incentivized entrepreneurs to invest in the fast-paced financial tech (Fintech) era that we know today.
Organizations such as challenger banks, e-payment portals, digital wallets, special credit cards, and loan payment applications started surfacing the market.
It wasn’t long before these new and fancy products were all over the marketplace. Their marketing was aggressive, digital, and influencer driven.
They came with this unique and idealistic concept of offering service with low on negligible transfer charges, minimum or no interests, and where the eligibility criteria are less compared to the traditional legacy banks.
It was easy for the public to go crazy for the new stylish children’s companies of fintech. They were fast, they were convenient, and they were for everyone.
Soon products like these started to skyrocket in their subscriptions and users. They were the new game for the investors to put their money on.
The possibility of revenue was exponential given the urge to consume by the public. If there’s one thing that is common between millennials and Gen Z is their tendency to spend, spend, and spend.
These people want to spend now, want to spend with the least interest, and want to do this like there’s no tomorrow. This cooked up the perfect opportunity for modern Fintech products to target them.
The companies have the characteristics of operating at a micro-level and fail to forecast any strategy for the macro-level operations. A wide majority of these applications generate revenue from rebate charges.
And the Debacle Happens
After the COVID-19 pandemic, further fuelled by the Russia-Ukraine war and changing geopolitics dominance including the US-China trade war, the central bank has since increased its interest rate. The move has, as expected, been mirrored by all the global banks of the world.
As a factor of rising inflation, consumers have been forced to curb their spending limits and therefore lessen their use of these applications.
As a result, the Fintech business has taken a hit across the globe. Fast forward to today, we see the industry grappling with its thirst for much-needed revenue.
Two major Banks complicit in this volatile Fintech investment: the Signature Bank and the Silicon Valley Bank went bankrupt all of a sudden. This sent waves in the market that Fintech might actually be on the verge of collapse.
One of the major reasons for the downfall of these banks was their over-investment in Fintech projects that unexpectedly failed to become lucrative. Furthermore, a large chunk of their investments were in digital currencies that came crashing down.
Fast forward to today, the hailed Fintech brands have seen depleting revenue and struggle to find additional funding. A big reason is the high interchange and rebate fees that most consumers and merchants fail to comply with.
Unlike traditional businesses with credibility and a diversified portfolio, these Fintech startups have failed to understand that they are a technology company and should have been focusing on their actual software offering.
Instead, jumping on into a race for more funding and popularity has caused them much loss along with the investors associated with them. Their reliance on a stable macroeconomic ecosystem is another reason for their downfall.
To circumvent these unpredictable times and come out as sustainable, Fintech companies need to think logically and long-term by understanding the actual dynamics of what’s going on.
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