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BFD Expert Voices - Private Credit

BFD Expert Voices

Fintechs increasingly see more promise in selling to banks than selling to consumers.

Why it matters: Launched as consumer tools, companies now argue working with institutions can reach more consumers.

Credit card payment startup Tally's move follows neobank HMBradley in pivoting completely away from serving consumers directly.

Like Tally, HMBradley plans to sell the underlying technology it built for the consumer market to banks that are looking to offer innovative new services to their customers.

Several other fintechs have moved to diversify revenues through B2B sales or spin off businesses that could be valuable to other financial institutions.

Publicly traded personal finance startup MoneyLion launched Engine, its B2B financial product marketplace, after acquiring Even Financial in early 2022.

That same year, U.K.-based Starling Bank introduced a B2B product called Engine, a cloud-native, API-based banking platform it sells to incumbents.

Last March, Greenlight launched a partnership program to make its kid-friendly banking services available through other financial institutions.

A few months later, consumer credit card startup Petal raised $35 million to spin out its B2B data analytics subsidiary Prism Data as a standalone entity.

State of play: Startups say the uncertain funding environment, increased customer acquisition costs, and a growing willingness among big banks to partner with fintechs the key drivers of this trend.

With funding harder to come by and valuations compressed, fintech companies needed to become more capital-efficient. This, in turn, drove some companies to rely on partners to reach their end customers.

Zoom out: Both the number of venture deals and the aggregate amount of venture financing going to fintech startups fell for the second straight year in 2023, according to data from CB Insights.

The number of financing deals for fintech startups declined from a peak of 6,172 in 2021 to 3,801 in 2023.

Meanwhile, the total amount invested by VCs into fintech companies dropped 70% in the same period, from $140.8 billion to $39.2 billion.

"I think founders are saying, 'Well, crap, no one's gonna fund me on this, and I'm not gonna get to profitability on my own. Is there a way I can monetize some things I built?" HMBradley CEO Zach Bruhnke says.

Between the lines: With the cost of acquiring new users rising dramatically, fintechs see partnering with large FIs as a way to reach scale more quickly.

"Being a direct-to-consumer business where you're trying to convince customers one at a time to download your app and spending tens of millions of dollars per month on Facebook ads and TV commercials is not the most efficient way to reach people," Tally CEO Jason Brown says.

"We just don't have finite marketing dollars to go acquire all of America … that acquisition of consumers now has to happen through partnerships," MoneyLion CEO Dee Choubey says.

The other side: While some businesses turn to B2B models to increase distribution, others see it as a way to diversify their revenue streams. MoneyLion was one of those companies.

"As a public company, what we realized was … it's a really hard war to compete directly with JPMorgan Chase, Wells [Fargo], Capital One and others for primary checking accounts," Choubey says.

That led MoneyLion to add a B2B offering through M&A that now makes up about a third of its revenue; more important, it's contributed to an expansion of the company's gross profits.

The big picture: Forced to do more with less, fintechs see partnering with or selling to banks as a more efficient way to operate their businesses.

None of this matters unless banks actually buy what fintechs are selling — and that's the biggest factor driving the trend toward B2B pivots.

Why it matters: Competition is causing FIs large and small to pursue fintech partnerships.

"There's increasing competition from all directions: from other financial services companies, but also from software companies adding financial services to own more of the customer's financial life," Andreessen Horowitz general partner Angela Strange says.

Yes, but: Banks "realize that they can't build everything themselves … that doesn't make economic sense, and therefore they should partner," Strange says.

Tally CEO Jason Brown says that prior to partnering with others, he saw multiple large banks try to create a similar product internally, but "they ended up not being able to get there. It was too long, too hard, too expensive."

Case in point: Just two years ago, JPMorgan Chase CEO Jamie Dimon bragged that his bank would invest $12 billion in technology.

Despite posting record profits in the prior quarter, that astonishingly large number was met with widespread disapproval among investors on Wall Street.

Since then, JPMorgan has become one of the leading partners for several fintechs, HMBradley CEO Zach Bruhnke says. "Because they're JPMorgan, everyone will bend to their will and their pricing needs, to the point where they get [tech] incredibly cheap."

And that, in turn, has led to FOMO among other banks who feel the need to keep pace.

The bottom line: "If you would have told me five years ago, 'You're going to be selling enterprise software to banks,' I would have said, 'I would rather shove bamboo shoots up my fingernails,'" Bruhnke says. "But also, five years ago, [banks] wouldn't have bought it."

State of play: Fintechs pivot from B2C to B2B

Companies argue partnering with banks will reach more consumers in need.

Illustration of hands holding up one hundred dollar bills. Each arm is in a row and getting progressively taller, to indicate growth.

Fintech

Fintechs increasingly see more promise in selling to banks than selling to consumers.Why it matters: Launched as consumer tools, companies now argue working with institutions can reach more consumers.

State of play: Fintechs pivot from B2C to B2B

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