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We’re a long way from the halcyon days of FinTech funding just a few years ago.
Sezzle CEO Charlie Youakim and Vera Equity Co-founder Jon Pomeranz told PYMNTS Karen Webster that in the current environment marked by higher costs of capital and nascent firms that flame out before promise turns to reality, a shift is in the works, and it’s a necessary one.
That’s especially true for the digital upstarts hoping to make their mark in payments — disrupting commerce in general and, perhaps, payments in particular.
“These transactional business models were trading at double digits, and now they’re trading at single digits,” Pomeranz said.
Things are changing — and much will change in the months and years ahead, he said. For the moment, there’s a wait-and-see approach on both sides of the equation, between the would-be targets and the would-be targeters.
The companies that were given a ton of capital have lowered their cash burn rates and are focusing on sparking or maintaining growth, he said. And the investors with the capital in hand are kicking the tires a bit more deliberately before pulling the trigger and striking deals. Both sides are looking to see valuations rise, which would spur FinTechs to consider a sale as an exit strategy; the venture capitals (VCs) want to see multiple ascend at least a bit so that they can start to feel more sanguine about getting returns on their investments.
The Times Are ChangingPomeranz was quick to note that he is bullish on FinTech’s long-term potential, and there is still significant greenfield opportunity to innovate within financial services. Smart decision-making about where to deploy capital means that a measured, roots-based approach is optimal.
As Youakim said, with a nod to what’s changing: “We’re going back to the fundamentals — everywhere.”
Sezzle, for its part as a publicly traded company, and with its eye on potential takeout candidates, has been focused on EBITDA (a rough measure of cash flow). For at least some of those startups that might catch Sezzle’s eye, some of those founders, he said a bit tongue in cheek, “they think they’re worth more than us.”
The result for Sezzle, which is profitable, is that in the build-versus-buy debate, building out new functionalities winds up winning. That’s unfortunate for some of the startups because an exit path is effectively closed, he said. For struggling companies that have good products and services but are grappling with cash flow, the hopes of a sale to keep the company extant just won’t bear fruit.
“The younger founders have said, ‘Well, if I don’t grow, what’s my multiple going to be?’” he said. “And my position is that if you don’t make any money, it does not matter what your multiple is.”
The shift is palpable, where the founders who were used to growth at all costs, looking for the next funding round, are now giving way to new CEOs who are focusing on operating income. According to Youakim, returning to the fundamentals of a balance between growth and profitability will help bring buyouts back into focus. We’re seeing a convergence of sorts, where VC investors have been focused on top lines, and private equity (PE) investors have been focused on EBITDA.
In the current environment, Vera has become adept at forging discussions with startups that focus on profitability alongside capital raising, Pomeranz said. Every dollar committed by Vera, for example, has risk attached because profits and growth rates determine whether returns can help give a tailwind to subsequent financing rounds.
“We’re encouraging a lot of firms to raise less capital and get to the targets that they think they need to get to, whether it’s revenues or even data, so that investors can look at client retention or other metrics to get to the next round of financing,” he said.
Asked by Webster what areas remain in focus, Pomeranz said an open-minded approach has been driving Vera, but cryptocurrency is a category that remains hard to gauge in terms of concrete opportunities. Direct-to-consumer (D2C) remains an area of promise.
In a world where artificial intelligence (AI) is seemingly attached to every name and every startup out there, Pomeranz said that “as you continue to look at these categories, it’s going be really important that you really get a sense of what are they doing that’s different.”
In terms of general strategy, Youakim and Pomeranz stressed that there needs to be a collaboration between boards, investors, CEOs, founders and investment firms.
“I’m an optimist,” Pomeranz told Webster. “Not everybody’s going to have a massive IPO, a huge home run … 90% of businesses fail. So, if you’re in the 10% that doesn’t fail and has a great outcome, that’s a win for everybody involved.”
The post Why FinTechs Should Never Stop Climbing the 'Profit Hill' first appeared on PYMNTS.com.
As inflation remains stubbornly in place and credit gets ever more expensive, credit unions may have a secret weapon.
Scott Young, managing VP of Emerging Services at PSCU, told PYMNTS that credit unions (CUs) stand to benefit from their lending operations, appealing to critical demographics, at the right time, with the right offers.
As joint research between PYMNTS and PSCU has found, just about half of millennials and bridge millennials say they’d be willing to change banks for a financial institution (FI) that would be able to extend better loan terms to them.
Those stats are encouraging, said Young, who noted that credit unions have an inherent advantage when it comes to lending: “Credit unions have had much more competitive loan terms, given our not-for-profit structure.”
Getting It RightFor the credit unions that get it right, using data to fine-tune their offerings and their loan terms can pay dividends, in the form of long-standing member relationships that may last decades. After all, the millennial generation spans ages 27 to 42, which is lower than the 47 years of age marked by the average credit union’s customer base.
“Credit unions can, should and probably will utilize targeted marketing campaigns that highlight competitive loan terms, which include lower interest rates and payment options,” said Young. Ideally, CUs should show the cost savings tied to its loans versus competitors’ offerings.
“Don’t be afraid to go head-to-head,” he said, as CUs are likely to win out against their larger banking competitors, adding, “I can’t begin to tell you how many of my family and friends I’ve actually converted to credit union loan products because it’s better for them.”
As with so many things in finance and banking, data can lead to product and service differentiation. Young maintained that the savvy CU must fine-tune its lending products at an individual level, avoiding the old methods of flooding customers with numerous offers and hoping something will stick.
“It’s important to build out the personas and the cohorts of your members to understand what products are attractive — and what’s missing,” said Young. PSCU, for its part, is getting deeply entrenched in “enhanced” credit scoring, that can make its way across lending channels and give CUs additional insight into their member bases.
“We also have predictive models around growth, attrition and financial hardship,” he said, which can help CUs take a proactive approach to loan management once credit has been extended.
Eyeing Corporate Members, TooThe same approaches mentioned above can help CUs craft stronger relationships with their enterprise members, too, noted Young.
“There’s significant interest in business lending right now, from a CU perspective,” he said. Many firms are looking to enhance their cash flow, and having immediate access to funds is critical. Against that backdrop, he said, with capital requirements in place, larger banks are slowing down their small business lending. That leaves room for inroads to be made by CUs, which tend to have in-place relationships with those firms.
No matter the borrower — an individual or a firm — Young stressed the importance of having digital channels in place to get those loans and credit cards (and offers) to clients so that the process is easy and, of course, quick. PSCU has partnered with Amount, a FinTech, to help CUs extend credit card offers to their clients, with real-time decisioning and cash-back incentives on the cards in the mix.
“There’s value being placed on digital, on-demand and convenient lending,” he told PYMNTS.
The post Data and Better Loan Terms Help Credit Unions Win Millennial Business first appeared on PYMNTS.com.
Following a years-long venture capital (VC) bull market that saw FinTech startups raise billions of dollars in funding, the challenging macroeconomic market has led to a sharpened focus on belt-tightening, with firms now under mounting pressure from investors to have a clearer path to profitability.
But how long will it take to achieve that holy grail of profitable growth? What factors come into play? And what should founders keep in mind as they undertake that journey? These are some of the questions that Mark Fiorentino, partner at VC firm Index Ventures, attempted to answer in an interview with PYMNTS’ Karen Webster.
According to Fiorentino, the path to profitability requires a multilayered approach, the first of which involves “tangible bottoms-up unit economics exercises” to understand the underlying fundamentals that drive not only a firm’s gross margin, but more importantly, its operating margin.
Read also: Sezzle CEO: FinTech Path to Profitability Starts With Being Your Own Worst Critic
It’s determining “the cost of keeping the lights on” without factoring in any innovation, expansion or go-to-market efforts. It’s a basic skill that was put on the back burner at the height of the VC bull market but needs to be reprioritized again, he said.
Understanding the company’s go-to-market unit economics is the next crucial step to help startups gain valuable insights into the effectiveness of their sales engine and make informed decisions about their growth strategies.
As Fiorentino noted, it’s determining how much a dollar of sales, or a dollar of marketing, generates in incremental revenue and “understanding that to an almost formulaic basis is more important than ever.”
At the third and final level, he said startups need to evaluate additional product, research and development (R&D) or expansion plans through “a net present value lens” to ensure that investments align with long-term profitability goals.
“Essentially, you should have [an idea] of what the actual yield of this CapEx is,” he said.
See also: An Industry Insider on Profits and the Need for FinTech Self-Scrutiny
He acknowledged that the path to profitability is not always a straightforward one and sometimes entrepreneurs may need to consider seeking additional capital or merging with another business if the company’s burn rate is too high.
In those instances, the onus is on investors to initiate conversations with founders, no matter how uncomfortable they are, to re-strategize and reset the business strategy to boost growth.
“It’s helping them see and understand the lens to why it might hurt or not feel good to have this conversation short term, but still be the best for them from an ROI standpoint in the medium to long term,” he explained.
Spending in the Right PlacesAsked about lessons he learned from the FinTech space that he is now applying as a VC investor, Fiorentino, whose professional experience includes a four-year stint at Stripe, said it boils down to building expertise in a few key areas of the business and not having a finger in too many pies.
“A big learning for me is that if you spread yourself too thin, you might do everything at 60% versus [focusing on] the two or three ancillary core products that you can do at 100% and do well,” he said.
Moving forward, Fiorentino said one area that holds great promise is the B2B sector, which he described as “an archaic but massive industry with a lot of payments volume flowing through it.” He singled out the billion-dollar freight supply chain logistics space in particular as an example of a vertical with huge potential but in need of innovation.
On the flip side, he said that as much as opportunities abound in the FinTech space today, investors need to approach some business models, such as those in the lending space, with utmost caution.
For these balance sheet-heavy business models, he emphasized the need for founders to have differentiated data workflow attached to the lending portion of the business rather than have lending be the core value proposition to survive in the competitive market.
“You just have to acknowledge that your differentiator cannot be zero cost of capital if you’re going up against J.P. Morgan or Goldman Sachs as a lender,” he said. “It’s just never going to work.”
Finally, he said there are still a lot of “solid business models” in existence despite the VC funding crash and advised founders to have a core business model that they understand well from a unit economic standpoint.
“From there, you’re allowed to spend as much money as you want,” he said. “You just have to make sure you’re spending in the right places. But if the core doesn’t work, then it’s like running a car on a bicycle engine. It just won’t make sense.”
The post Index Ventures’ Fiorentino Says FinTechs Need ‘Thrive but Survive’ Mindset to Ease Path to Profitability first appeared on PYMNTS.com.
There’s a reason that business processes get the “consumer” treatment, not the other way around.
And it isn’t just because the cart can’t drive the horse.
As it relates to end-user purchasing experiences, “[those of] consumers are just dramatically more streamlined than the experience business buyers have, partially because consumers have simpler needs” Shawn Cunningham, managing vice president and head of Capital One Trade Credit, tells PYMNTS.
But simpler needs don’t “make up the whole difference,” Cunningham said.
He explained that business buyers are often presented with a “consumer experience” such as the option to pay by credit card, which doesn’t always work for how businesses operate.
What businesses need for a best-in-class purchasing experience is typically longer or more flexible time to pay, more tools and information to meet their business needs, and clear, attractive terms.
“To access these, businesses have to apply, wait for approval, and it’s often a manual and clunky experience tied to the supplier’s business hours for servicing. Plus, the billing and payment application is often slower and paper-driven rather than electronic,” Cunningham said.
That’s why, in today’s fast-paced business landscape where consumer purchasing experiences are becoming increasingly streamlined, it is imperative for businesses to reimagine their business-to-business (B2B) accounts receivable (AR) processes.
Solving for the Missing Level of SimplicityThe manual and paper-driven nature of B2B AR processes doesn’t only hinder efficiency and inhibit a smooth transactional experience — it could be costing firms repeat business.
“The amount of paper that is still passed around in the B2B space continues to stun me, and it’s somewhat by choice, but more and more, I think businesses are looking for a better way,” Cunningham said. “Almost half of all businesses are spending online — and this trend is expected to continue to grow.”
He points to Amazon for Business as having gained a competitive advantage and attracted B2B customers away from traditional suppliers — growing to $35 billion in business transactions along the way — in part just by offering them a simple and easy buying experience.
Supporting that streamlined B2B experience, Cunningham said, are features such as instant decisioning for credit approvals, extended terms up to 60 to 90 days and a one-click experience for purchasing, on-demand invoices and details of everything purchased.
“They’re providing that control and visibility into the purchase and payment process, the things that are really unique and needed for that business customer,” he said, emphasizing that Amazon’s sales aren’t incremental — they’re coming from suppliers that aren’t providing as optimal an experience.
Particularly in an uncertain economic environment, minimizing the risk of losing existing customer business is crucial for enterprises looking to sustain a healthy level of growth.
Legacy Processes Pose Risks and Inefficiencies for SuppliersTo adapt to changing expectations and behavioral drivers, businesses need to transform their AR processes.
“When you start thinking about the evolution and the revolution in AR, manual and clunky B2B AR processes are just a danger to how suppliers are doing business,” Cunningham said.
Various solutions exist to help businesses transform their B2B AR experience. AR automation software offers technology to streamline the order-to-cash process, including digitizing bills, enabling online payments and automating reminders and payment processing.
“Most B2B suppliers are also dealing with structural problems related to cash flow and the risk of nonpayment. These issues can be exacerbated in times of change toward online or more customers that they do not know. When customers extend payment terms out to 30, 60, or 90 days, suppliers have to wait to get paid, putting a lot of pressure on their cash flow,” Cunningham explained.
Another option is full-service AR solutions that manage the entire accounts receivable process, from credit decisioning to funding, risk protection, billing, collecting and servicing. Businesses that successfully implement full-service B2B AR solutions enjoy a transformed process, eliminating manual inefficiencies and optimizing cash flow. The supplier maintains control while saving time and providing customers with an enhanced experience and tools that were previously unavailable.
“A full-service AR solution can transform a manual, clunky in-house program into one that is tech-oriented, digital-first, and automated,” Cunningham said. “While also improving a merchant’s cash flow and protecting against the risk of non-payment.”
The post Why Old Accounts Receivable Systems Cost Firms New Business first appeared on PYMNTS.com.
FinTechs are facing an existential crisis now that the age of easy access to capital is over.
Investors — running the gamut from private venture capital firms to Wall Street activist investors and retail masses — are demanding to see profits. Sustainable black ink on the operating line nowadays trumps heady revenue growth rates. Cash flow is king.
A key staple of FinTech/neobank operating models — that’s interchange-related revenue — might be legislated away.
Amid the great digital shift, customers are used to fee-free offerings, so it’s no easy task for these digital startups to simply layer on new charges for alternatives to traditional banking. There’s no guarantee that the loss of top lines tied to interchange can be replaced.
Want another pressure point? In the wake of the collapse of Silicon Valley Bank in March, funding is harder to come by, while end customers — the individual and business account holders who might otherwise choose neobanks as providers — are parking their capital with marquee financial institutions (FIs).
In a conversation with Karen Webster, Sezzle Co-founder and CEO Charlie Youakim and Dave founder and CEO Jason Wilk said neobanks’ pivot toward profitability depends on finding new ways to empower consumers.
Apps and FinTechs, Youakim and Wilk said, can help give clients easy conduits into the traditional banking landscape, gain access to credit and find flexible ways of managing their money, without the fees that are hallmarks of traditional FIs.
The onus to expand financial access is especially acute given that more than 60% of U.S. consumers live paycheck to paycheck, according to PYMNTS and LendingClub research.
As Wilk noted, the pivot to profitability has no one-size-fits-all strategy as “there are lots of different neobanks, serving many different purposes.”
The metrics bear Dave’s and Sezzle’s strategies of helping consumers stretch their paycheck-to-paycheck dollars. Dave operates as a publicly traded neobank that has 1.9 million active monthly users as measured at the end of 2022. Sezzle, publicly traded in Australia, has plans to list on the NASDAQ in the United States and posted a profit the last two quarters.
Dave went public in 2021 and has made headlines for being backed by Mark Cuban among other investors. Dave’s genesis stems from addressing a pain point Wilk said he had trouble with while banking with incumbents: overdraft fees, which can cost consumers as much as $400 annually.
Finding the Pain Points“Through 15 years up until the time I started Dave, I was hit with thousands of dollars in overdraft fees — and I was dissatisfied with the level of service I was able to get as a customer with not a lot of money in hand,” Wilk said.
The first product launched under the Dave imprimatur was an app that could connect with an existing checking account, setting up alerts to warn consumers if their accounts were at risk of “going negative” and paying what was tantamount to a 1,700% APR via an overdraft fee, he said.
In that way, holders could take action against being hit with fees of $35 to $100 on, say, a $5 charge that tipped accounts into the red. To that end, Dave would initially “spot” individuals (at first $75 but now up to $500, and where the average stopgap extended by Dave has been around $120 to $200 for the ExtraCash offering) for free to help them power through any short-term pain between paychecks.
Dave, in turn, charged $1 per month for the financial insights and the warnings, having linked to the primary bank accounts that provided the raw data pointing to the ebbs and flows of daily, monthly and upcoming transactions that could push users toward overdraft status.
In addition, the company had an early model where consumers could “tip” what they thought was fair for the service they received. The $3 or $4, on average, that individuals tipped was a good return on capital because Dave’s default rate has historically been low.
Although the anchor product remains fee-free cash advances, Dave’s model has evolved to include its own checking account, powered by a partner bank, and a Dave debit card, he said. Artificial intelligence (AI) modeling and direct deposit offer reliable income streams against which the company can underwrite the cash advances.
Alternatively, for the members who get those advances the same day they join, those users link their Dave accounts to an incumbent via Plaid. The Plaid data is fed into Dave’s AI model, which parses paycheck and other data.
Finding the Overlap — and Moving Beyond InterchangeSezzle’s Youakim said there’s some similarity between his firm’s customer base and Dave’s. The consumers tapping into buy now, pay later (BNPL) find value in being offered installment options at the moment they are trying to make purchases in an environment where inflation has been ever-present and paycheck-to-paycheck pressures are predominant.
For both Sezzle and Dave, these customers are not the ones with $250,000 and above that are concerned with FDIC insurance and switching to big banks to make sure their wealth is safe. These are customers who want to bank with providers that cut out fees and help them improve their financial health.
“One of the sayings that our CFO has is that our customer is always in a recession,” Youakim said. “We’re trying our best to help that customer build up their credit score and get onto the next stage of their financial lives.”
Added Wilk, amid the banking crisis that’s underway, “this is where we show up and do our best work.”
The membership of $1 a month has helped build a community of consumers who in turn can take advantage of other offerings such as being connected to the company’s “side hustle” project that helps users apply for gig jobs and earn money from surveys.
Beyond the question of what happens to interchange, and with a wealth of diversified revenue streams, Dave makes money from helping process automated clearing house (ACH) and other transactions.
Youakim said Sezzle would make moves to diversify beyond interchange, perhaps through subscriptions. During what might be termed the tech apocalypse, the goal will be to think of where, when and how to expand services.
Both leaders talked about similar service expansions in their respective businesses as they both push to profitability. Many FinTechs are being compelled to expand services into verticals that compete with other FinTechs in order to expand gross profit, which is creating new competitive paradigms.
Wilk said Dave has been profitable before and will be profitable again. The company has been busy improving its variable margins and has found leverage and success in negotiating partnerships, which helps move toward profitability.
“We’re serving the majority of Americans,” said Wilk, who added that “they need help building their credit and help avoiding fees in their banking lives. They need help with financial recommendations, and none of this is going away soon.”
The post FinTechs’ Latest Profitability Challenge Is Finding Business Models Beyond Interchange first appeared on PYMNTS.com.
Digital wallets are helping to create a faster, more expedited checkout for consumers.
As financial institutions (FIs) and tech companies battle for market share and compete to bring their offerings to market, digital wallets also raise the table stakes around convenience for other payment methods.
“I think there’s obviously a strong market for it,” said Cody Banks, managing vice president of payments and fraud strategy at PSCU, the largest credit union service organization (CUSO) in the United States.
He told PYMNTS that he views anything that can give consumers greater choices as a “win-win for the end payment user.”
PYMNTS’ research in the February 2023 report “Digital Economy Payments: The Ascent of Digital Wallets” found that although credit and debit cards are still the payment methods of choice for most consumer purchases, the availability of alternative options, such as digital wallets and buy now, pay later (BNPL), are becoming increasingly important — particularly for online shoppers. Digital wallets are already cannibalizing the use of debit cards online.
Pairing Payments With Data“It’s pretty exciting what [digital wallets] have going on,” Banks said. “The ability to pay and pair transaction data with the payment is pretty unique. There’s a great opportunity here in the sense of sticking to the secret formula — which is not so secret for credit unions — of matching the [payment] experience with personalization.”
PYMNTS research shows that the shift toward transacting more online and less in-store is continuing, with eCommerce significantly driving retail revenues.
Still, Banks said he doesn’t see investing in a digital wallet option as a mission-critical top priority for credit unions, at least right now.
“Building a payment method that will compete with Apple, PayPal … that’s a pretty tall order for a lot of reasons,” he said. “And on top of that, you’ve got to get the merchants involved — and that experience has to be not only the same as what Apple and PayPal have, it’s got to be better for folks to want to use it and then continue to use it … playing in that space is going to be very tricky.”
That doesn’t mean, though, that credit unions must sit back as alternative payment methods and other products get swept up in an ongoing digital transformation. Rather, as Banks said, the priority should be to buttress third-party digital wallets with the key personalization benefits credit unions are uniquely positioned to offer.
“Credit unions definitely should focus on their digital imprint and experiences by investing in data-driven campaigns to personalize the payments experience, which is their niche,” he said. “There are far more exciting things for credit unions to do [beyond digital wallets] related to enhancing the digital payment occasion, whether that’s chat bots, AI, or other ways of knowing your member and looking out for their bottom line in a financially healthy way. Now more than ever, [credit unions should be] taking that data and making more informed decisions, providing that personalized experience to members.”
Read also: Banks out to Challenge Big Tech in Brewing Digital Wallet War
He added that the relevant approach for credit unions today is really about honing in on the member payment journey and identifying which elements can be coupled with data-informed benefits.
“How can we weave together the story of financial wellness for [credit union] members using data?” Banks said. “It’s those experiences, knowing the member in a way where you can provide value for wherever they are in their life’s journey. They’ve lost a job, they’re saving for a car, paying off college loans, they’re traveling, they’re retired — there are products for all of these that we can provide. I think that’s the most important piece.”
Digital wallets collectively represent a much higher share of online spending than in-store spending, and each transaction comes with a rich, if typically anonymized, behavioral data set.
“It’s important to consider those other channels,” Banks said. “There’s no need to boil the ocean here, and I often see credit unions looking at things like, ‘OK, here’s the big picture of what I need to do and how can I do it all right the first time.’ And our advice is constantly to take things chunk by chunk, ask what you can control, what are the pieces you can get on the phone with someone right now, the vendors, and journey map that out … chipping away at big goals and not just setting them is the important piece.”
He added that he sees digital wallets as eventually going from novelty to normality to necessity and that credit unions should look at their product pipeline and judge how they can add value to this still-emerging new normal.
If Sezzle CEO Charlie Youakim had to write a book about the FinTech bubble that burst in 2022, he’d call it “Crazy Money.”
That nugget came up in a conversation between Youakim and PYMNTS’ Karen Webster during the first discussion in the new series “FinTech Reset: The Pivot to Profitability.”
Webster tossed out some startling statistics to set the stage, noting that roughly $130 billion was invested in FinTech startups in 2021 alone, a 169% increase over 2020. During that year, Twitter and Block founder Jack Dorsey was worth more as an individual than U.S. Bank, and for a while, PayPal had a higher valuation than J.P. Morgan.
It’s all to illustrate the “crazy money” that investors and venture capitalists threw at any idea, as the growth-at-all-costs mentality put profits and sustainable business models aside, promising “growth.”
“We had such a hot market for so long, it just became money chasing money; reason had left the building,” Youakim said, recalling companies that raised $300 million to $400 million, and when the hammer came down, some had just $20 million in revenue.
“It’s absurd,” he said.
In the buy now, pay later (BNPL) installment credit space in which Sezzle operates, the crazy money atmosphere found some FinTechs paying $500 apiece to acquire a customer.
“This irrationality of money flowing in and creating competition for customers and mindshare created tons of irrationality where rationality used to exist,” he said.
Going into 2023, Yoakim said Sezzle is profitable, but it took hard choices and tough actions to get there.
The Pivot to Profits
To Youakim, a survivor of the dot-com bubble, it started to feel a lot like déjà vu all over again in late 2020 when Sezzle went to remote work during pandemic lockdowns, and he spent some of his time in Puerto Rico. There he watched as the cryptocurrency money began flooding the real estate market, and developers were working seven days a week putting up $38 million houses for this newly minted crop of crypto millionaires.
It just didn’t add up, he said, and soon, FinTechs were taking their place alongside crypto companies, fueling a faux sense of business prosperity and success.
“It was becoming pretty obvious that things were getting inflated because you saw this crypto money flowing in, and you could sense that these were not real businesses, not real ideas,” he said. “It was just, ‘Make a coin, convince a bunch of people to invest in it, and you’re going to make a bunch of money.’”
The war in Ukraine that started in February 2022 was an inflection point. Inflation was already rising to scary levels, and VCs were questioning business models. Even Sezzle’s stock took a hit.
But Sezzle had already begun strategizing on how to pivot from acquiring as many new customers as possible to becoming a profitable business when yellow arrows started to flash red.
“That’s when I started to feel like, ‘Oh no, things are going to start heading south,’” Youakim said. “That was probably in November of 2021. So, we started to talk internally about what we needed to do to get to the point of profitability as a company.”
Making the Tough CallsSezzle found itself “challenged unit economics-wise as a company,” which meant that some deals with large merchant customers had to be repriced, he said. Going back to enterprise partners and renegotiating pilots was difficult, and not without consequences as some of those deals fell apart.
Additionally, he said too many cohorts of its portfolio were unprofitable due to processing costs or their lack of purchase frequency and had to be cut. Because of Sezzle’s scale, many of these changes took months to implement, including lending parameters that were tightened and unprofitable cohorts that needed to be culled.
Sezzle also began incentivizing customers to use automated clearing house (ACH) bank transfers instead of cards for payments, which Youakim said was easy compared to other difficult choices that had to be made.
“We had to do a layoff,” he said. “I’m not proud of that. It’s the only time I’ve ever done it in my career, and I don’t ever want to do it again.”
Along with that, Sezzle disbanded its international businesses because they were some of its most unprofitable on a unit economics basis.
Fast-forward to late 2022 and early 2023, and some of those frustrated partners started to see that Sezzle was perceptive about market problems and transparent in its approach to fixing its model.
“Because we were so early in the path, I think in some ways it’s a feather in our cap because they saw, ‘Hey, this partner, Sezzle, had a lot of foresight,’” he said. “‘They saw this coming and adjusted earlier than most.’ Most people want to work with smart partners. I think in some ways it helped us with those relationships because we were so honest about it.”
Building a Better Business 101
Changes enacted during this time included taking a different view of how to spend capital responsibly when surrounded by others spending like the proverbial drunken sailor.
Youakim spoke of the leadership at other FinTechs “that wouldn’t mind playing financial mind games or tricks in terms of where the true costs are,” harking back to the example of the FinTech that was spending $500 to acquire one customer.
“That’s not realistic,” he said. “That’s not sustainable. That’s a game. You’re only playing a game to float numbers higher, but really the game is going to come down on you in the end.”
Be Your Own Biggest CriticAnother part of the internal work the company did was a series of town hall meetings with younger staffers who had never been through a market crash, at least not as working adults.
“Most of them have never experienced a downturn,” Youakim said. “They don’t even know what the hell we’re talking about, quite frankly. We were explaining that we had to go from growth to profit in town halls. I would do business basics courses on gross profit, profit margins, operating expenses, and how we have to have operational leverage.”
Staffers were terrified about stakeholder reaction, and not without reason. He said he knew that changes the company was making would upset some stakeholders — and did. His job was to manage and “mitigate that part of the journey.”
Today, as one of those that took the bitter medicine and is thriving, Sezzle’s advice to FinTechs trying to do the same comes down to a few basic but vital pointers, Youakim said.
The first is to “be the biggest critic of your own business,” which is an unfamiliar mindset to many, he said. He also advises taking a clear-eyed look at run rate and burn rates.
“If you only have 18 months of runway, ... you should make sure that in six months you’re already profitable, so you have some cushion,” he said. Otherwise, you become the subject of “are they going to make it” talk.
“I think the pendulum has definitely swung towards profitability,” he concluded.
3DS 1, 3DS 2.1, 3DS 2.2. These acronyms should be crowding merchants’ minds as fines loom this fall for those who are not in compliance with the latest version of the 3D Secure protocol for authenticating eCommerce card transactions. But the state of readiness for the latest wave of authentication protocols remains uneven at best, […]
Wessel Matthee, information security compliance manager at Entersekt, told PYMNTS that through the past few years, there’s been a shift in the ways in which fraudsters try to steal personally identifiable information (PII). Phishing scams were the lure of choice before the pandemic, he said. “But fraudsters are always going to try to stay one […]
If you granted one wish to virtually anyone doing business in the cryptocurrency world, and especially those involved in making payments and transferring money, they would likely ask for regulatory certainty. With the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Office of the Comptroller of the Currency (OCC), Internal Revenue Service (IRS) […]
In the darkest hours of the pandemic when stimulus money was being provided, COVID-19 tests and vaccinations were free to patients, but someone had to pay the bills. In most cases, it was the health system that delivered the services, and getting reimbursed is proving to be a bear. This has much to do with […]
Banks are accustomed to vying with FinTechs for customers, but increasingly, they’re partnering with them as a way to win new businesses and better serve their customers. Access to FinTechs’ technology and speed to market is driving that evolution. While banks may not have the technological edge many FinTechs offer, they do have an advantage […]
Is “fraudster” a title or job description of some kind? Perhaps it should be, because when shopping or sending money online, you’re never totally sure who’s on the other end. It could be someone you know — or it could be a bad actor who stole the right username and password. The level of digital […]
To quote that old song: “To everything there is a season.” And payments, there are seasons for disputes. In an interview with Karen Webster, Verifi CEO Sara Craven said that the summer looms as fertile ground for disputed transactions as companies struggle to keep up with demands amid the great reopening. Airlines, hotels and […]
Even amid the great digital shift, some things haven’t changed. “Many people still love to hate passwords, and still have to wait for authentication requests that [often only] come through [via text] every now and then,” Gerhard Oosthuizen, chief technology officer at Entersekt, told PYMNTS in a recent conversation. Relying on short-message service (SMS) and […]
In the last couple of decades, consumers’ preferences for cross-border payments have been shifting, and more and more people are demanding convenience, speed, security, and above all, value for money, said Kaushik Sthankiya, chief commercial officer of subscription-based global payments provider Sokin. But compared to the rapid growth in innovative payment and remittance solutions for […]
Customer acquisition costs aren’t less costly, and consumers have a universe of choices at their fingertips now. It’s time for businesses and consumers to get to know each other better because the ripcord methods of the pandemic must be refined, or defections will scale. It’s crystal clear to David Bruce, vice president, Global Head, Channel Partnerships […]
By and large, credit unions (CUs) are weathering the pandemic well, but nimble FinTechs and resourceful big banks want those loyal CU members as their own, making digital investment and service offerings a hot priority for CUs as the world moves toward an endemic economy. For the study “Credit Union Innovation: Product Innovation as the […]
If you remember Internet 1.0, it looked like a pinball machine and wasn’t very smart, making search results an adventure that often ended in disappointment. Selling is much the same, passing through its early “just slap up a website” phase and graduating to the experiences we now know and expect. For all the ground gained […]
Open banking is emerging across every market, but it’s doing so at different paces, for different reasons and in the face of different challenges. “I think the reason for the emergence of open banking is probably driving the challenges that are being faced in each of those markets,” Simon Armstrong, vice president of products at […]