The early 2020s were defined by extreme fintech spectacles. Before the criminal meltdown of FTX, there was the meme stock explosion. In January 2021, with no warning, stocks for companies long-presumed moribund — such as GameStop and Bed Bath and Beyond — shot into the stratosphere for reasons that no conventional stock analyst could explain.
For millions of onlookers, this “meme stock” moment was time to break out the popcorn, a form of entertainment. But it was also a sign that the entire fintech revolution had reached an awkward peak. The Covid stimulus had put money in the hands of restless investors, some of whom turned to Reddit boards to find unorthodox uses for their cash.
Read part one: Fintech’s Wild Ride: Who Will Dominate the Next Phase?
Thousands of them adopted fintech platforms, mainly the perversely named Robinhood, as their venue of choice. The implosion of the meme stock phenomenon — and the subsequent near-collapse of Robinhood — was not just the story of a consumer mania and a flawed company: It was a cautionary tale that exposed five flaws permeating the fintech ecosystem:
The tech didn’t deliver. A huge portion of these day traders were buying and selling stocks on Robinhood, the upstart app that made commission-free trading the norm and famously made stock trades feel like a video game. It quickly became clear, however, that Robinhood could not handle the volume of trading.
A crucial premise of the fintech revolution was that superior technology would deliver more satisfaction to customers, but Robinhood was AWOL when thousands of customers needed it the most. In a single day, 26,000 Robinhood customers signed onto a class-action lawsuit, and later Robinhood CEO Vlad Tenev was hauled in front of a Congressional hearing.
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Regulators can’t keep up. The meme stock incident called attention to regulatory holes in the fintech landscape. Robinhood was a serial offender at the state and national level, for everything from poor customer service to letting teenagers trade options. Crypto firms complained that they couldn’t figure out if their currencies were being treated as a security (as the Securities and Exchange Commission asserted) or a commodity (as the Commodity Futures Trading Commission argued). BNPL firms came under attack for not communicating hidden fees to consumers.
Internal controls were meager. Although fintech managed to reach tens of millions of customers in a few short years, internal compliance and legal oversight were slow to keep growing pains were beginning to show. The COVID pandemic and lockdown had looked for a time like a bonanza, with billions of stimulus dollars flowing through fintech companies.
The Paycheck Protection Program (PPP) issued tens of thousands of loans to businesses to prevent lockdown-era layoffs, many of which went through fintechs. But due diligence was lacking; subsequent investigations showed that a disproportionate number of fintech PPP loans involved some type of fraud. In October 2022, the once high-flying fintech lender Kabbage, acquired by American Express in 2020, filed for bankruptcy, amid probes that it had mishandled thousands of PPP loans.
Even when outright fraud wasn’t taking place, many fintechs were found cutting corners or misleading consumers. Since 2021, the Consumer Financial Protection Bureau has issued millions of dollars in fines against neobanks Hello Digit, as well as BNPL firm GreenSky.
The easy money couldn’t last. In retrospect, it seems obvious that the fintech rocket was fueled by years of cheaply available capital. As interest rates began to rise, investors, private and public, began to sour on fintech. Venture capital investment in fintech companies shrunk every quarter in 2022, plummeting from about $25 billion in the first quarter to about $8 billion in the fourth quarter.
Changing of the Tides:
How much the dollar value of venture capital has fallen since 2022:68%
Publicly traded fintech companies fared about as bad or worse. PayPal began 2022 at about $195 a share, and ended the year at $71 a share. “Insurtech” companies have nearly disappeared. When Root went public in October 2020, its market capitalization was nearly $7 billion; today it is about $128 million.
It’s little surprise, then, that the fintech IPO market (along with the broader IPO market) shriveled in 2022 and 2023. Layoffs followed. In January 2023, crypto exchange Coinbase laid off nearly a fifth of its staff; the next month, BNPL provider Affirm laid off the same proportion.
Business models were shaky. Perhaps most importantly, many fintech business models did not hold up under scrutiny. Klarna, a Sweden-based behemoth that was once Europe’s biggest private company, admitted in early 2023 that the BNPL business on which it grew was not sustainable. “Candidly, ‘buy now, pay later’ is just a feature,” David Sykes, Klarna’s chief commercial officer, told me in early 2023.
“If all you’re doing is offering the ability to break a purchase up into installments, we don’t think, long-term, that’s dynamic enough.” Facebook, which changed its name to Meta, dropped its much-touted plans to introduce its own currency. Goldman Sachs shuttered its personal finance business Marcus, and sold, in October 2023, the BNPL business GreenSky it had acquired two years before; the bank lost billions in its attempt to build an app-based consumer business.
And yet, as we enter 2024, fintech’s revolution remains intact. No one who gets a loan though SoFi is ever going to go back to a bank, simply because that’s a better experience; the fintech sector continues to put pressure on traditional financial service firms to improve products and service.
The industry giants, the survivors like PayPal, Stripe, Block (formerly Square), Affirm may be bloodied, but they still stand, at least for now. All the fundamentals that built fintech — the need for faster, easier, and cheaper monetary transactions — are intact.
Next: Lessons Learned and the Coming Rebound (coming up)