When we started writing about fintech in October 2020, the sector appeared to be setting the world on fire. There were so many interlocking sectors: proptech, payments, crossborder payments, Buy Now Pay Later (BNPL), insurtech, and of course cryptocurrency. PayPal was trading at nearly $200 a share, which would grow to more than $300 by July 2021 before heading back to Earth (today it’s at $86). The combination of user experience, loose regulation and a lockdown-driven need for contactless payment seemed to be ushering in a new era in how people interact with money. Private capital was flooding the sector, and even unrelated developments like government stimulus payments propelled the machine forward.
And yet, even then, there were signs that fintech was a bubble.
2020 was a banner year for initial public offerings (IPOs), and the biggest of all that year was the mobile-phone-based insurer Lemonade. Its shares skyrocketed more than 140% over their opening price in July. Still, the fundamentals of the insurance business never changed, and the very first FIN/Observer newsletter questioned whether Root, Lemonade’s Ohio-based competitor, could prevail despite the sector’s hype:
While Root’s growth is impressive—150% increase in auto policies from 2018 to 2019—it has also lost a staggering amount of money: some $600 million since 2018, which is more than the total amount the company raised from venture firms.
It’s not merely the red ink that is troubling, but also the company’s explanation for it. “The principal driver of our losses to date is our loss ratios associated with accidents by our customers,” says the Root S-1. “Establishing adequate premium rates is necessary, together with investment income, if any, to generate sufficient revenue to offset losses, loss adjustments expenses…and other costs. If we do not accurately assess the risks that we underwrite, the premiums that we charge may not be adequate to cover our losses and expenses, which would adversely affect our results of operations and our profitability.”
Today, Root barely continues existence; the $6 billion market capitalization the company boasted in 2020 has dwindled to below $400 million, making unprofitable Root an also-ran in the insurance sector:
And Root is not alone; the entire insurtech sector is struggling. PolicyGenius, which as recently as March raised $125 million in a Series E round, is laying off 25% of its employees. In many cases, fintech companies were propped up by cheap capital and when, in September 2021, the US Federal Reserve Bank began signaling that interest rates would rise, their value began to tumble. The BNPL craze will continue to grow, but investors seem to have figured out that the landscape is so competitive that it’s hard to make profits. The share price of Affirm, the largest US BNPL-specific company, closed Friday at just over $25, its lowest ever and about a fifth of what it was 18 months ago.
The crypto hype machine will find new initiates, but there, too, reality has set in. Terra/Luna’s dramatic meltdown last month exposed the sector’s many weak points, and the fallout keeps coming. The crypto trading platform Gemini is laying off 10% of its workforce, and is being sued by the Commodity Futures Trading Commission for misleading investors about a bitcoin futures product, while Coinbase is rescinding job offers.
The fintech genie won’t go back in the bottle; people across the globe will continue to embrace the digitization of finance. But the reckoning is here, and the prevailing companies and their investors will have to live under a very different set of rules.
