Why profitability is the catch-22 of fintech consulting

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According to a study by deVere Group, the European fintech market has grown by 72% since the pandemic. Since last year, 19 European fintech have become unicorns, which means big institutions and new entrants alike are jostling to get a slice of the pie. As a result, fintech consulting has exploded and freelance finance analysts are finding themselves in high demand.

But in such a hotly contested market, an important question remains: is the fintech industry profitable? This might seem like a no-brainer considering the statistics just quoted. If Europe alone boasts 19 fintech unicorns, then surely yes, it is. But the thing is, when a market begins to get crowded, not every startup or initiative will have instant, stratospheric success. This is a sensitive topic that fintech consultants need to negotiate with their clients. 

In simple terms, if a project isn’t an overnight success, it doesn’t mean that it’s doomed to fail. Instead, companies need to assess whether it’s worth taking the rough with the smooth and weathering the unprofitable era to be a long-term success. But therein lies the catch-22: eventually, something’s got to give. In this article, we’ll look closer at the wider situation in regard to profitability and fintech.

Why fintech is booming

A recent report published by Capgemini and Efm suggested that fintech’s resilience during the pandemic was the key to its success. While traditional banking and financial services faltered, the sector enjoyed double-digit growth. In response, big banks have developed their digital-only offering, and meanwhile, fintech is diversifying and growing. According to the same report, 2019–2020 saw a 9% increase in deal activity between fintech and the wider sector.

The pandemic aside, fintech’s popularity is fuelled by consumers’ search for more convenient, personalised services from their banks. Accessible from the palm of your hand, powered by rich customer data, fintech can deliver on this expectation. This isn’t only to facilitate things like targeted advertising – it can also help build useful value-added tools, like spending reports and savings programmes.

Meanwhile, demand for green products is adding further fuel to the fire. Last year’s Global Retail Banking Voice of the Customer survey reported that 65% of consumers globally want banks to go paperless, use renewable energy, and avoid plastics. Fintech is particularly well placed to meet this demand, as paperless processes and branchless operations consume less energy.

While fintech continues to grow in popularity, the phenomenon should be viewed as an opportunity rather than a threat by traditional banks. Most consumers say that they still trust their bank and wouldn’t be willing to try a digital-only product from them. That said, they need to play to their strengths and let go of legacy technologies and operational practices to keep pace. 

Received wisdom in fintech consulting is you must put the customer first. This means considering the user at every stage of the digital journey, in order to leverage the potentially killer combination of established trust and digital convenience. Equally, there is no one-size-fits-all solution for every product; a consumer’s current account app will have very different requirements than an investment or cryptocurrency tool. 

This means that businesses have to invest in the right expertise and technology. In the early stages, this can make it challenging to turn a profit. This leads us to our central discussion: does a fintech startup or digital venture have to be profitable? The short answer is no; but as is the case in fintech consulting, there’s never truly a short answer. Let’s take a look.

What we mean by “doesn’t need to be profitable”

As we’ve touched on, fintech doesn’t just cover consumer banking. It can also cover investments, stocks, cryptocurrency, or even real estate. Every scenario requires a unique set of skills and capabilities, provided either in-house or by a freelance financial analyst. Whatever way you look at it, you need to invest in talent (there are more cost-effective ways to do this than others, but we’ll get to that later).

Big investments and big profits don’t always go hand in hand. However, fintech startups don’t have to be profitable – and that’s even if their value goes sky-high. That’s because as any good financial analyst will tell you, not every company has to turn a profit. Ever. Here’s why.

Many businesses don’t make a profit for years and years. Amazon was not a profitable business for ages if you can believe it. As long as the company grows and scales, it will survive. This will be due to the structure and the business model, among other crucial factors – namely, cash flow.

If your expertise is outside of finance, it’s important to appreciate that cash flow and profit are entirely separate issues. As the old saying goes, cash is king, even if you are running a fintech company. Access to working capital will be crucial. Often, this will be provided by some supportive shareholders. After all, in financial services, the margins are very thin; activities like payments or investment management don’t yield big profits. That’s why many fintech companies aren’t profitable – but they have the backing and the business plan to succeed.

…But the bottom line will win in the end

All that said, when push comes to shove, profit is preferable. Challenging times lie ahead for the fintech industry: buy-now-pay-later giant Klarna lately had its value slashed from $50 billion USD to just $6 billion due to inflation and rising interest rates. Moreover, investors are not so gung-ho considering the unstable economic situation, and with a possible recession on the horizon, things are looking tricky for plucky startups. 

For businesses of every scale, there are tough decisions on the horizon. Cutbacks, layoffs, and restructuring are going to happen in many organisations, and although never a pleasant topic, are the reality of success or failure. This is particularly challenging for growth-stage startups, who in spite of unicorn valuations, might not have more than 12 months of cash on the balance sheet.

This is the thing about short-term profitability. Without it, you need investment to survive and you can’t always control the whims of investors. There are bigger, macroeconomic forces at play beyond how great your product is or how well the business is run. Sure enough, it’s nearly impossible to turn a profit from day one, but don’t be under the impression it doesn’t matter at all. You need to find the balance. Even if investors are enthusiastic and the cash is flowing, don’t rely on it forever.

So the conclusion is: take on that venture, go for it. Just make sure the foundations for profitability are laid. All they may not be that unshakeable from the outset, make sure you develop a business model that can work without external funding. For big players and startups alike, the current climate demands that new ventures are sustainable, and to achieve this, financial consulting will take on a whole new significance.

Get fintech consulting that’s on the pulse

As implied, a perspective of wider market dynamics is essential to effective fintech consulting. Even if there is a wealth of internal finance talent, this is what sets apart a financial consultant from any other type of profile. They’ll bring a bigger-picture perspective, which will enable the project to better navigate rough waters. 

So what is the function of a financial consultant? Also sometimes referred to as a financial analyst, they’re responsible for ensuring the business accomplishes its financial goals through their insights into the market, modelling the company’s financial situation, drawing up forecasts and giving the company options.

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Certainly, high-value startups and big banks alike could look to traditional consulting firms to get the expertise they need. But when margins are tight, they’re better off looking to the freelance market. With a more streamlined offering than consultancy firms, but with all the expertise, freelance fintech consultants bring all the skills with none of the baggage. And where can you hire freelance fintech consultants? Well, you’ve already arrived: at Outvise.

Outvise is a global network of over 36,000 Business Tech experts that are available to work remotely or on-site, depending on your project’s needs. All vetted and pre-certified, the network is shaking up the way financial services, telecoms, tech, and indeed, management consultants themselves, find consultants. Click here to explore the network.