Payment: the banking policeman denounces the overly optimistic business plans of fintechs

Heavy promotional spending, but accounts still in bright red. The banking policeman of financial services (ACPR) pointed out, on Tuesday, the business models of certain fintechs which he considers far too optimistic.

“Many of them still show low – or even no – profitability, often due to the double effort of commercial conquest and innovation in order to impose themselves on a very competitive payment market, writes the authority in a study. These efforts are reflected in particular by staff costs and external costs much higher than in the development plans initially envisaged”.

The ACPR thus targets certain payment or electronic money institutions, these players who have been developing very strongly over the past five years, taking advantage of a European directive (PSD2) which has given a boost to the sector.

A total of 62 of these institutions – sometimes known by the improper term “neobank” – have been approved in France and are still in operation. They offer services such as tracking expenses, building up a kitty or providing an account for making payments, etc.

While some, such as Nickel, for example, are profitable, “the ACPR notes a significant gap between the business plans presented during approval and the results achieved by these new players”. The authority therefore calls on candidates for these approvals to be more realistic in the future.

Chronic lack of profitability

More serious, explains the financial policeman, several establishments (as of December 31, 2020) were no longer even able to fulfill their prudential obligations, that is to say hold sufficient capital. “Remedial measures have thus been taken”, explains the ACPR.

To explain this chronic problem, the ACPR does not hesitate to point out one of the dogmas of the world of start-ups: achieving profitability is not a priority, since one can raise funds. “The ability of these new players to finance this lack of profitability thus relies in large part on their ability to obtain long-term financing, especially from venture capital investors”.

An essential tap, but which could one day close. Hence the encouragement to “perpetuate the sources of financing for the activity, including in the event of an unfavorable economic climate that limits the possibilities of raising funds” from venture capitalists. After the health crisis, the war in Ukraine could put the nerves of investors – and therefore also of entrepreneurs – to the test.

Mortal danger for fintechs

The ACPR fires a few arrows in passing at the banking sector, not necessarily very “fair play” with these fintechs which themselves need banks, to secure customer funds.

“New players are finding it increasingly difficult to find banks or insurers willing to provide them with the guarantee required by the regulations,” explains the authority. This is a mortal danger for payment institutions, since in the absence of protection of customer funds, they can lose their license.

The reluctance of fewer and fewer banks to offer this service can be explained by an active policy of “derisking” (more prudent risk management), admits the ACPR, but which nevertheless requires that a bank informs him of the reasons for any refusal to open a ring-fencing account.

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