European fintech lending startups have racked up over €11 billion in debt facilities in 2023 but many are running unviable models and will never become profitable, claims a report from credit fund WinYield.
WinYield carried out 95 in-depth interviews and due diligence of 27 fintechs, finding what it calls "cracks" in their credit models and approach.
Less than 10% of the fintechs interviewed have staff with previous relevant credit experience. Common underwriting models are composed of a black box using basic regression analysis with no human overlay to assess the actual viability of loans.
WinYield says that in many cases delayed payments are running up to 10% of the entire fintech lenders' portfolio, this is four times higher than in bank SME portfolios. And, while the $12 billion in debt facilities is largely composed of senior debt, it's the €514 million venture capital that is at risk of disappearing which has first-loss exposure.
Many of the firms analysed will never become profitable, largely because marketing and operational costs were significantly underestimated while the market opportunity was dramatically overhyped, says the report.
Those that do become profitable will likely need to pivot several times and ultimately partner with a bank.
Fabricio Mercier, CEO, WinYield, says: "The VC funding drought has actually helped clean a lot of the malpractice in fintech lending, bringing European fintechs to their senses with a degree of discipline and rationality returning to their decision making. Now we are entering into the phase of Fintech 3.0, with more experienced founders doing more with less.
"Although there's still a lot of learning to be done, the fintech sector is reshaping for a better future. By getting serious and institutionalised, fintech will grow again, partnering with credit funds and banks."