Many fintechs need to “fix their business models”, according to VCs who invest into fintechs.

Recent years have seen it become uncool to work for or bank with traditional financial institutions. It was far more fun to work for or bank with one of the many fintech startups, which seemed to be ignoring stodgy banks brands.

The Federal Reserve increased interest rates and stocks crashed. Many fintech firms that had been doing well suddenly began to look less profitable. hardy and hale. It is now questionable whether fintech has lost its mojo.

In a panel discussion hosted by this editor Late last week in San Francisco the answer was clearly no. But the panelists, Mercedes Bent of Lightspeed Venture Partners and Victoria Treyger from Felicis — didn’t sugarcoat it either.

Led by moderator Reed Albergotti —  the technology editor of the news platform Semafor All three VCs recognized the challenges facing the industry, but also highlighted opportunities.

Startups and their backers seem to have gotten ahead of themselves during the pandemic. Albergotti suggests that while fintech was “going wild” in the era when everyone was working remotely and using payment apps, times have changed and Covid is now in the background.

He said that SoFi was down. “PayPal has gone down.” Frank was mentioned by Albergotti, a college financial aid platform which JPMorgan acquired in the fall 2021 after lying to it about its user base. Albergotti stated, “They don’t have 4 million customers.”

Williams agreed, though she said that there are some positives as well as negatives for fintechs. Williams said that it was still early days for fintech startups, and she agreed with this. Based on what she’s seen, she stated that consumers still want better alternatives than traditional financial institutions.

Williams stated that Williams believes it is more difficult for companies to improve their business models. Williams also said that many of the public companies went public when they probably shouldn’t have. Although a lot of the usage is still present, it is important to shift some fundamentals. Many outfits have spent too much on marketing and now face increasing delinquency cost because they used less stringent underwriting standards than their traditional counterparts.

Williams also said, “The banks don’t think they are dumb.” They have woken up and will continue to awaken to the possibilities.

Treyger expressed her concerns as well. “Certain financial services sectors are going to have an extremely difficult year ahead,” Treyger said. “In particular, lending.” Lending will suffer huge losses. . . Because it’s an unfortunate triple whammy: consumers lose jobs, interest rates rise, [rise] Capital costs are higher.

Treyger stated that it’s a challenge for many players, even larger ones, and that “even big banks” have doubled their loan loss reserves. It could get worse for young fintechs. Many of them have “not managed to survive a downturn — started lending in six years or less” and that is where she expects “to see the most casualties.”

Bent, who manages a lot Lightspeed’s Latin America investments and is also on the boards for two Mexico-based fintechs seems to suggest that although U.S. fintechs are facing severe headwinds, fintech companies outside the U.S. continue to perform well. This may be because they had fewer options to choose from.

It depends on the country, said Bent. He noted that the U.S. has the “highest adoption of fintech wealth management and lending services” while in Asia they are much more successful in consumer fintech services and lending.

All three said that it’s not all doom & gloom. Treyger recalled that she was part of the founding group at a company before becoming VC. since-acquired Kabbage is a SMB lender. “Once a month, they would meet the new innovation unit that has just been established by bank XYZ. They’d like to learn about how you generate ideas and how to drive innovation.

Treyger said that CEOs and CFOs tend to cut back in areas they don’t consider critical during a downturn. This will open up “significant opportunities for fintechs who are creating products that add value to the bottom line.” After all, CFOs are about profitability. How do you reduce fraud? How can you improve payment reconciliation? There is great opportunity for 2023 in this area.

The full conversation, which also touches upon regulation and crypto, can be viewed below.