It is all well and good to look closely at the tech giants and their success stories, but deep diving into the biggest FinTech failures can give a lot of helpful insight.
Kicking us off this month is Mike Ivancie, CMO at UpMarket, who was the VP of Marketing with a competitor, CNote, around the time Swell launched and ultimately failed. After watching them closely as a competitor, Ivancie offers his thought on their downfall.
Mike Ivancie, CMO at UpMarket,
1. Misalignment with target market financial realities
The fundamental flaw in Swell’s strategy was its focus on a demographic that lacked sufficient investable assets. Millennials, burdened with student debt and facing challenging economic conditions, simply didn’t have the capital to sustain a platform of Swell’s scale. With an average account size of just US$2,333, the economics were unsustainable given the 0.75% management fee.
2. Overestimation of impact investing appeal
While socially responsible investing was gaining traction at the time, Swell overestimated its appeal to younger investors; and their ability to invest at all. Impact investing remains more of a luxury for the wealthy rather than a primary strategy for those building wealth.
3. Performance and product issues
Many impact investments underperform financially or fail to deliver tangible social benefits to make up for that underperformance. Often Swell and similar roboadvisors, were just offering repackaged versions of existing non-ESG investments like index funds, with simple inclusion/exclusion rules. Which makes social impact measurement difficult or impossible, while also leading to potential underperformance when compared with a broad index like the S&P 500.
4. The fading allure of social impact investing
Contrary to initial expectations, the trend toward social impact investing has not maintained its momentum, particularly in recent years. More recently, the initial enthusiasm for ESG and DEI initiatives has waned, with investors becoming more skeptical about the real-world impact and financial performance of these strategies. This shift in sentiment has made it increasingly difficult for platforms like Swell to attract and retain investors, especially among younger demographics who are more focused on building wealth than potentially sacrificing returns for social impact.
5. High customer acquisition Costs and low LTV
Despite efforts to reduce marketing expenses, Swell’s customer acquisition costs remained high, ranging from US$150 to US$350 per client. These costs, combined with low average account sizes, made profitability an uphill battle. The payback period was too long.
Ultimately, Swell had fantastic marketing and a great brand but their model was doomed.
When the company was shuttered, Swell had only US$33 million in invested assets despite raising over US$30 million from Pacific Life.
If anything, this case study shows how difficult it is to grow a challenger financial brand and that the segment of customers you target may be the most important choice of all.
Matthew Goldman, Founder and Managing Member at Totavi
The most recent failure that is probably at the top of everyone’s mind is Synapse, one of the original banking-as-a-service companies. Synapse found a strong market fit early on in the fintech boom cycle of the 2012-2022 era by offering a platform for other entrepreneurs to build their fintech products. Key early customers like Mercury had explosive growth driving Synapse’s own growth.
However, the company always had signs of management issues, from early lawsuits by employees to complex terms and banking operations. It all came crashing to a halt this year when they were unable to raise more capital or find a buyer and they failed, creating tremendous havoc amongst their customers. A lack of care about compliance and a stubborn belief in valuations that were no longer relevant led to their downfall.
Speaking of being fast and loose, one-click checkout company Fast is a notable failure. Led by a charismatic-seeming entrepreneur, Fast was very good at making noise and raising money but seemed to lack a real product and meaningful revenue. Fast was a victim of its own hype and failed due to being a company that was solving a real problem, vs. being a company that seemed to serve the self-interest of its founder.
BlockFi was an innovative crypto exchange and lender that created interesting products such as the first major crypto-rewards credit card. Unfortunately for BlockFi, their relationship with FTX led to collateral and funding challenges and the entire company collapsed during the 2022 crypto crisis. Hypergrowth without profitability leads to situations where companies must keep rising. When the music stops, sometimes they are left without a chair.
Marty Meany, Founder of Goosed
One of the best examples for me is Synch Payments in Ireland. This was a combined effort by traditional banks AIB, Bank of Ireland, Permanent TSB and KBC (who have since exited the market) that started in 2020 to take on neo banks, namely Revolut.
The traditional banks were found out to be laggards in the tech space by customers. Banks were slow to integrate modern functionality and support mobile payment services like Apple Pay and Google Pay. In what was apparently all banks moving slowly to keep each other happy, the door was left wide open for a disrupter to enter the market; enter Revolut (and to a lesser extent N26). Revolut made getting set up easy. They support modern payment methods and super quick transfers. The introduction of split bills made paying for dinner with friends simple, but combined with referral rewards, their base here in Ireland exploded to one of the biggest penetrations they have globally.
The traditional banks were left extremely worried about this neo-bank’s potential and they came together in an unprecedented effort to build a modern solution that customers would love and steer them back away from Revolut.
The goal for Synch was to launch a payment app called ‘Yippay’ to make transfers between friends simple and to make online checkout a single click.
Alas – late in 2023, Synch folded owning to “A combination of factors has contributed to an elongated time frame to launch which makes the original Synch proposition no longer viable”.
Knowing the Irish FinTech space, it’s clear what happened here. Irish banks, BOI and PTSB in particular have never handled technology well. To expect these banks to now suddenly deliver a best-in-class solution to the Irish market while working with their competition was always going to be a bridge too far. Sure enough, KBC leaving the market didn’t help, but this project was simply never going to happen.
For me, it’s the perfect example of why neo-banks like Revolut are thriving in the Irish market while the traditional banks refuse to deliver what their customers need or invest in overhauling ageing infrastructure.
Meanwhile, neo-banks are growing from strength to strength. Revolut continues to deliver functionality that is considered best in class. Though customers are still reluctant to use them as a primary bank, they are very common for day-to-day spending and have a massive base in Ireland, ending 2023 with over 2.7 million customers (over 50% of the population).
To read more on finance from Goosed.ie click here.