You can’t stop fintech startups. After raising staggering sums of capital through 2021, the financial technology startup industry ran into a valuations wall this year as public markets retreated and many formerly high-flying fintech giants took lumps. Late-stage fintech startups got caught up in the wave of revaluations.
Smaller fintech startups are proving to be similarly vulnerable, data from the seed market recently showed. And yet, taking another look at the recent cohort of startups that went through the American accelerator Y Combinator, you wouldn’t really be able to tell that fintech had lost much of its founder favor.
Of the 223 companies that participated in the latest Y Combinator batch — not counting the companies taking part while operating under the radar — 79 had a fintech theme of sufficient heft to put them into the category, according to a Demo Day page sorted by the accelerator. That’s a sizable portion.
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There’s no shame in contra-market optimism; one could argue that startups by definition need at least some of it to get off the ground. But we were a bit surprised to see not only so very many fintech startups generally in the group but also new names in categories that have long felt over-full, or perhaps even passé, to our eyes. Again, contra-market optimism is no transgression — it’s a wager.
Let’s take a quick look at the startups in the latest YC batch, from BNPL and neobanks to SMB-focused upstarts and the world of crypto. Perhaps there is more market left on the bone for startups in those areas than we thought!
BNPL
The buy now, pay later boom has run into some complications; many startups building BNPL services have pitched themselves more as technology companies than, say, consumer lenders with a diverse book of credit quality.
As part of the market correction, it appears that the worth of BNPL revenue is being revalued, and not to the positive. This does not mean that BNPL companies are value-free; they certainly have worth. But if they are, in fact, worth far less per dollar of revenue — or per multiple dollars of loans affected — than previously anticipated, they might prove difficult as venture investments.
That’s not stopping startups from pursuing the model with new twists. Of all the types of fintech companies that we are discussing today, this is the smallest group. Tranch and Drip are the two firms that truly meet the BNPL threshold. Tranch is focused on offering buy now, pay later services to companies so that they can spread out certain business costs with a focus on software and service expenses. Drip, in contrast, is bringing BNPL to Brazil, where installment loans already enjoy strong in-market presence.
Both are not simply bringing BNPL to vanilla markets where they won’t have some sort of edge; Tranch is building something tuned for a particular business need, which, given the scale of software purchases, could wind up being a large market, and Drip is tackling a country where similar methods of consumer purchases, its target market, already have a share.
While we framed this piece as an overall look at surprising entrants into now-less-favored subsectors of fintech more generally, it appears that the BNPL boom has become smaller and more targeted. That’s actually about what we might expect from a market reforming to meet new investor requirements.
Neobanking
While BNPL startup activity appears to be evolving to fit into a changed market landscape, the neobanking boom is trucking along like nothing has changed — and Y Combinator is riding shotgun. In retrospect, “neobank” could have been on our Demo Day bingo card: There are six companies in YC’s S22 batch that describe themselves as a “neobank for X” — not to mention one “digital bank” and one “challenger bank.”
The fact that YC backed eight neobanks reveals a shift, though. Yes, the accelerator is known for often backing similar businesses, even if it means that they will compete against each other. But each neobank in this batch focuses on a different target audience, from remote workers (Ping) to couples in India (Coupl).
Having a specific focus is perhaps the main reason why YC still thinks there’s space for more neobanks. Nubank’s parent company, Nu Holdings, has been trading below IPO price for a while now, but that’s a generalist neobank, unlike its latest peers at YC.
As always with targeted offerings, there’s always the question of whether the total addressable market is large enough. YC likely pondered this too, and none of its picks have small audiences.
For instance, it would be hard to argue that Pana‘s target — “the 62 million of Latinos living in the United States” — is niche. The same goes for Moneco, which serves African migrants in Europe. Still, we wouldn’t be surprised if some of the most successful companies in this group exited via M&As, not by going public.
If M&As do happen, traditional banks would be among the most likely buyers. It is no coincidence that regulators are “growing increasingly wary of banks and fintech startups getting too cozy,” as our colleague Mary Ann Azevedo reported. But it also shows that fintechs are doing things that banks won’t or can’t.
SMBs
Christophe Robilliard, the founder and CEO of Peru-based fintech Kashin (YC S22), shared some thoughts with us on Latin America’s situation when it comes to banking and SMBs.
“The SMBs in LatAm, and in particular the small and micro businesses,” Robilliard told TechCrunch, “are marginalized from the financial system because they simply do not qualify for credit under the traditional scoring system. And the traditional financial institutions are making the correct decision, because this segment does represent a risk they cannot control with the tools they have on hand, and regulations usually forbid them to use alternative scoring.”
That traditional banks are unable to properly support SMBs creates space for companies like Robilliard’s Kashin, which aims to be “Square for micro-merchants in Latin America.” It also explains why several other founders taking part in YC’s latest batch are focusing on addressing this gap, from Mexico’s Apprecio and Trebu to Kenya’s Patika.
Crypto
Given the Latin American fintech efforts above and what we know about investor enthusiasm for web3 services in the area, it’s unsurprising that we saw a host of crypto-focused startups during demo day focused on the region. The sheer number of web3 entrants, however, was nearly a shock — 30, more than the 25 we saw earlier in the year, when crypto was more alive than it is today.
After all, crypto prices are down — we’re in the midst of a web3 “winter,” to use the common parlance — and even the leading entities of the market are suffering (Coinbase is an easy example to reach for there). And yet! Rio is building a Moonpay-like service in Latin America, while Kapstar wants to bring U.S. dollar access to Brazil via decentralized finance.
That both of those examples have a consumer bent is not a surprise. As TechCrunch noted as part of a specific dive into the crypto companies that made up the sub-cohort:
There are a number of startups in the cohort working on making crypto more user friendly for both developers and end users, as well as a range of different infrastructure-focused companies building out the behind-the-scenes plumbing of the cryptoverse. [ … ] Consumer-facing wallets seem to be a major area of focus this year, perhaps partly as a response to the common criticism that web3 products are clunky and confusing for everyday users. [ … ] Even outside of wallets, there is a clear focus on consumer-facing products in this batch, with startups Internet Friends and SolStar both looking to capitalize on the growing demand for community and group-based investing.
It appears that Y Combinator’s founders remain as bullish as ever that mass consumer adoption of crypto services is just around the corner — or at least close enough to make for a huge market opportunity before their cash reserves run low.
With a total of 79 fintech startups, per Y Combinator’s own classification, and TechCrunch counting 30 crypto companies, nearly 38% of financial technology startups in the latest batch are building on the blockchain. So much for a crypto winter from a technical perspective; if you can’t stop fintech, you most certainly cannot damper entrepreneur fascination with its decentralized subsector.