Andy Bell, the founder of the investment platform AJ Bell, has warned investors about the future of unprofitable Fintech firms. His comments come hard on the heels of news that environmental wealth manager Clim8 is shuttering, and that impact investing platform Tulipshare is closing its brokerage arm. A lack of profits and an inability to raise fresh funding were behind both closures.
No profits no future?
Andy Bell stepped down as CEO of AJ Bell last year but he remains at the firm on a consultancy basis.
Mr Bell founded AJ Bell in 1995 and built the firm into a FTSE 250 business with a £1.40 billion market cap and annual revenues of almost £44 million.
So he is well qualified to speak about the Fintech space and the prospects for companies within it.
Speaking about the growth in the number of Fintechs that have sprung up to sell services directly to consumers Mr Bell said:
“It’s pretty frightening and some of these start-ups are already running out of runway.”
He added that:
“AJ Bell made a profit in its first month and has made a profit every single month in its existence – I think that’s (seen as) old-fashioned nowadays”
Mr Bell went on to say:
“Ultimately businesses need to make money and there are some business models out there that I look at, and think it’s just inconceivable that they could ever make any money now.”
What are the risks for retail clients of unprofitable Fintechs?
When asked about the risks for retail investors in trading through these new fintech platforms Mr Bell highlighted the potential counterparty risk and the role of the regulator in protecting clients saying:
‘There are businesses out there that, without another fundraise, are going to go off the cliff edge in the not too distant future”
“You really should be able to expect that a business will still be around in 12 to 24 months and beyond that. I think the regulator does have a responsibility (here)“
The outlook for unprofitable Fintechs over the medium term
When he was asked about the medium-term outlook for unprofitable firms in the space he said:
“Over the next two years, as private equity capital dries up for these guys, and they’re still on a cash burn, I’m not sure what happens at the end of the runway”
As we recently noted funding for European Fintechs has fallen by more than -80% year to date when compared to the same period in 2022.
While Fintech valuations have slipped by more than -40% when compared to 2021, according to data from San Francisco-based consultancy FirstPageSage.
Many Fintechs seemed to have confused cheap debt or equity with positive cash flow and profits, during the period of zero, or even negative interest rates, and inflation.
Thats proving to be a costly error now that interest rates and prices are rising sharply.
Salaries for coders, engineers and other key personnel are rising in a tight labour market, whilst the fees or commissions that businesses can charge for their services are being driven down, and kept low by intense competition for customers.
What’s more the acquisition cost of a new customer in the UK could easily exceed the lifetime value of that customer to a Fintech startup.
Economies of scale and critical mass are well-understood concepts in business, but they are increasingly hard to achieve. And if your Finetch didnt manage to generate those, in a financial services boom, then, as Andy Bell points out your future is far from certain.