Conditions turned against fintechs in 2022, as investors lost their appetite for high-growth but unprofitable businesses and rising interest rates weighed on leveraged business models.
Companies in sectors like buy now pay later and consumer lending announced that they had shifted gear and were on the path to profitability, but by year end few of them had made any real gains.
A long list of companies, including Zip, humm, Sezzle, Openpay, QuickFee and Laybuy exited overseas markets, cut staff numbers and trimmed product portfolios as they attempted to generate cash flow.
They hope to stay onside with investors but indications are that the investors have lost their appetite for these types of business.
In a number of cases, companies made cuts but then had to cut again. In August, humm group announced that it had stopped offering hummpro, a BNPL offering for small business, and closed bundll (a BNPL product for small payments) in New Zealand.
The company’s current strategy is to reduce its exposure to the small-payment, pay-in-four buy now pay later segment and make big-ticket instalment purchases its core consumer offering.
But in November there was more rationalisation. The company announced that it planned to get out of the English market.
For some, the belt tightening exacerbated their problems rather than generating cash flow.
In November, Laybuy released its September half-year financial report, which showed falls in underlying sales and active customers numbers.
In July, the company had announced that following a strategic review, it would cut headcount by one-third and take measures to reduce fraud and impairments by improving the quality of its customers and merchants.
The cost-cutting took its toll. In the six months to September, the company’s September half customer numbers fell 7 per cent and underlying sales (gross merchandise value) fell 13.4 per cent.
It was a similar story for Zip. In a September quarter update, it reported that US transaction volumes were flat quarter-on-quarter and revenue fell 1 per cent. Active customer number fell 5 per cent. The only positive was a 6 per cent increase in merchant numbers.
The falls were not a single quarter blip. Year-on-year, US revenue is flat and customer numbers are down 3 per cent.
The Australian and New Zealand business recorded double digit year-on-year growth in revenue, transaction numbers and merchant numbers, although the growth numbers are well below the figures it has reported in the past.
Zip closed its Singapore business and is in the process of getting out of the UK. It is reviewing all its overseas businesses. The cuts have not done much to improve the company’s position.
Another factor exacerbating the problems these companies face is rising funding costs.
In October, instalment payment company Sezzle reported that it secured a new two-year credit facility to support its business in the US and Canada. It signed a US$100 million facility agreement with finance company Bastion Management, which replaces its previous facility with Goldman Sachs and Bastion.
It is paying a margin of 11.5 per cent over the secured overnight financing rate (SOFR – the replacement for US LIBOR), which is currently