Fintech firms eager to gain market share at the expense of turning a profit have found their business models left in the lurch, the boss of savings startup Chip says, as some of the UK’s biggest players flounder in widening losses.
Simon Rabin, chief executive of Chip, told Financial News that too many fintech firms such as digital banks Monzo and Revolut are stuck with loss-making business models that are overly reliant on generous venture capital funding to stay afloat.
“We’ve seen consequences more recently, where certain fintechs have pursued growth above all else and haven’t given enough respect and consideration to the profitability of their business, and they’ve paid a heavy price for it,” said Rabin in a 28 September interview.
“Some fintech companies pursued satisfying their customer with user experience and functionality, without giving enough consideration to the potential profitability of what they were offering,” he added. “And the result is they have relatively large customer bases that are using their product [and] features, but they are not generating revenues for the business, and I would question the long-term sustainability of that.”
Some of the UK’s largest fintech companies have been loss-making annually since their founding more than half a decade ago, but turning a profit has become more important as the businesses mature and head for public markets.
Rabin’s comments come as Chip, founded in 2017, recorded its first profitable month in August. While the savings app boss said he expects the business to be in the black again for September, he is planning for losses longer term.
The app, which offers easy-access cash savings accounts alongside funds managed by BlackRock and AI-driven management tools, currently has a market share of less than 2% of UK savings accounts with 400,000 customers. Rabin said it plans to reach five million customers and around 25% market penetration within three years.
He added that reaching profitability was key for Chip to demonstrate that “the economics stack up and to make this a viable business for investors and our shareholders”.
“From the conversations that we’re having, venture capital is much more focused on potential profitability,” he said. “Right now, I think companies such as Monzo would struggle to raise capital in today’s environment like they did a couple of years back.”
Venture capital cash has poured into British fintech companies, with Revolut stealing the limelight this year after it became the UK’s most valuable private technology company ever at a valuation of $33bn.
Banks have also become more active players in fintech. Goldman Sachs and JPMorgan, both of which have launched their own digital challenger brands in the UK, made moves this year including Goldman’s £50m investment in Starling Bank and JPMorgan’s acquisition of digital wealth manager Nutmeg.
Chip is currently raising new funding from investors, approaching institutional firms for the first time alongside its fifth crowdfunding round. It plans to raise £100m over the next two to three years to finance its upcoming expansion into Europe, it told FN, having picked up more than £25m to date from the crowd and the UK government’s Future Fund.
Monzo co-founder Tom Blomfield recently criticised the economics of crowdfunding for startups, calling it “probably the slowest, hardest and most expensive way to raise money” in a personal blog post this month after garnering more than £23m for the bank via Crowdcube.
“He is categorically wrong, I completely disagree with that,” said Rabin.
“It’s given us the capital that we needed at early stages but also an army of loyal, engaged customers who… keep us on track and focused on what customers actually want from the product, rather than perhaps Tom, who has pursued a strategy of doing what his venture capitalist investors were telling him to do at the time, which was pursue growth at all costs.”
Monzo was contacted for comment regarding Rabin’s statements.
The Chip boss said he is targeting European venture capital firms to lead its current funding round, as the firm will require expertise on the continent for upcoming licence applications and office expansion.
Despite the recent influx of cash into the sector, Rabin said major banks are not ideal investors because they are too focused on what fintech firms can contribute to their core business.
“It’s quite limited, rather than speaking to true venture capital, where it’s about what the business needs,” he said. “[One bank] said: ‘Would you like to sell our insurance products to your customers? If so, maybe we’d make an investment’ — not really.”
Revenue at the firm has risen 500% since December, as customers have put away their extra cash during the pandemic. Chip plans to add another 200 jobs in the UK over the next 12 months to meet demand, as well as spending significantly on marketing and product development.
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