“A significant gap between the business plans presented during approvals and the results actually achieved by these new players”. In its “panorama of new payment players”, the banking regulator, the Prudential Control and Resolution Authority (ACPR), on March 15 sent some (well-felt) spades to fintechs, and in particular concerning their financial projections. These establishments, a contraction of “finance” and “technology”, have proliferated on the French market over the past ten years thanks to the opening up of the market established by two major European directives.
Whether they are payment or electronic money institutions, more than half of the 62 existing players, 32 to be precise, obtained an ACPR license after 2018. Remember that these are not banks, because unable to offer loans or savings products. The gendarme had also warned them last year about the highlighting of the term “neobank”, a source of confusion between payment institutions and credit institutions. Note that in France, N26 has bank status, and Revolut announced at the end of 2021 that it had deployed its Lithuanian banking license in France.
By clarifying their status, the banking regulator also took the opportunity to recall the structural financing weaknesses of these fintechs. “Many of them still show low – or even no – profitability”, underlines the ACPR. With the exception of Nickel, which has constantly pointed out that it has been profitable since 2018, personnel costs but also those related to technical service providers exceed the amounts estimated at the start of their activity. So much so that these two positions represent on average 373% of their operating income (the income generated by their activity).
Too much reliance on fundraising
It is therefore through financial infusions that these fintechs develop. Investors with deep pockets, funding is obtained from large venture capital funds. Revolut raised 800 million euros last summer, valuing the company at 28 billion euros, a third more than Société Générale. However, the fintech based in Lithuania suffered a loss of 230 million euros in 2020, or 83% more than in 2019.
However, this solution will not last forever, and some institutions, until very recently, did not comply with the obligation to hold sufficient capital. “These situations underline the need to sustain the sources of financing for the activity, including in the event of an unfavorable economic situation that limits the possibility of raising funds”, points out the ACPR. The banking policeman thus underlines the importance for these companies to take into account pessimistic scenarios when applying for approval, a caution that is far from superfluous, given the fate of the C-Zam and Morning companies, which have both disappeared from the landscape.
For years, however, the situation has not fundamentally changed. Already in 2018, a number of establishments had shown their ambition to be profitable by the end of 2020, despite the doubts expressed by the regulator at the time: “If the players surveyed in our study aim for a total of 13.3 million customers at the end of 2020, there is no indication of growth in the French market: the French population is already heavily banked, demographic growth remains low and the hypothesis of a structural increase in multi-banking is debated”, pointed out the ACPR in its study on the business models of online banks and neobanks, in October 2018.
It is currently impossible to know if the customer target has already been reached, or even that it will be at the end of 2022, because the establishments are not transparent on the subject. The only significant statistic made public, the three largest establishments alone total 5.5 million customers. But hard to believe that the rest of the competitors can claim the nearly 8 million remaining customers, despite the multiplication of players.
Protect customer funds
Finally, another obstacle comes in the way of fintechs: the protection of their customers’ funds. Since they are not credit institutions, they have the obligation to confine the money of their customers to a real bank. The funds are deposited in accounts specially designed for this purpose. So that in the event of bankruptcy, these liquidities remain intact. An effective method but which is increasingly difficult to implement. Banks frequently refuse to provide this guarantee. On the one hand to avoid holding risky assets, but above all because some of them impose heavy interest rates on fintech in exchange for the service rendered.
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