A steady stream of fintechs have announced layoffs in recent weeks. Chime, Varo, Upstart, Stripe, Blend, MX, Brex are among the financial technology companies that have laid off more than 10% of their workforce.
Is this just the result of economic malaise? Did some grow too fast and hire too many people? Or are there other factors at play?
The answer: all of the above.
"VCs have been throwing money at fintechs for a long, long time," said Alex Jimenez, managing principal, financial services consulting at Epam, a consulting and software design company based in Newtown, Pennsylvania. "They have continued to hire to scale up and in some cases they have overhired. So it's not necessarily that [these fintechs are] in trouble, but it is that they need to adjust their hiring for what is in their immediate road map."
Venture capital investors are now asking tough questions about customer bases, scalability and profitability.
"And they're holding the fintechs accountable," Jimenez said.
In a Nov. 3 email to Stripe employees, CEO Patrick Collison blamed the economy and miscalculations he and his brother John, who is president of the company, made for the fact that they were laying off 14% of staff.
The pandemic led to high growth in e-commerce, and San Francisco and Dublin-based Stripe's revenue and payment volume have tripled since 2020, he said.
But "the world is now shifting again," Collison wrote. "We are facing stubborn inflation, energy shocks, higher interest rates, reduced investment budgets, and sparser startup funding" as "many parts of the developed world appear to be headed for recession."
Collison wrote that though Stripe is "well-positioned to weather harsh circumstances…we do need to match the pace of our investments with the realities around us."
Also last week, San Francisco challenger bank Chime cut 12% of its 1,300-member staff, laying off160 people, a spokesperson confirmed.
"To ensure the long-term success of the business and as we look at current market dynamics, we are focusing our organization to be fully aligned with our company priorities," she said. "As a result, we are eliminating some positions, while still hiring for select others. We remain very well capitalized, and these steps will continue to position us for sustained success."
The same week, Upstart in San Mateo
Challenger bank Varo laid off 75 people in July. In August, mortgage software company Blend
These staff reductions mirror those at the largest tech companies. Twitter laid off 3,700 people last week as new owner Elon Musk took the company private. Meta is said to have a downsizing planned for this week. Amazon, Lyft, Robinhood and other big tech companies are cutting head count.
The economy "is definitely playing a pretty big role," said Rudy Yang, senior analyst at PitchBook. "It's a huge aspect of what we're seeing going on right now."
Some fintechs are coming down from a high they experienced in 2021, due to the lower interest rate environment, lower cost of capital and higher consumer spending tied to pandemic-relief stimulus checks.
Fintechs focused on growth, which investors sought in 2021, over profitability.
"A big result of that was fintechs just over hired," Yang said. "We now see a reversal of that trend entirely. A lot of investors are focusing on return to quality and profitability."
Reining in spending on people and other costs
In his email to employees, Stripe's Collison took an apologetic tone.
"We overhired for the world we're in and it pains us to be unable to deliver the experience that we hoped that those impacted would have at Stripe," Collison said.
"In making these changes, you might reasonably wonder whether Stripe's leadership made some errors of judgment," he wrote. "We'd go further than that. In our view, we made two very consequential mistakes." These were being too optimistic about the economy of 2022 and 2023 and growing operating costs too quickly, he said.
To correct those mistakes, the company is going to cut other costs beyond head count, he said. He did not give any specifics.
Chime CEO Chris Britt said that in addition to head count, the company would reduce office space, renegotiate contracts with vendors and cut marketing spend, according to Robert Le, senior analyst at Pitchbook.
"I think marketing is a big one, especially if you're a retail and tech company," Le said. "There's been a lot of marketing spend over the last 18 months."
Could this help banks scoop up tech talent?
Some banks are eager to find opportunity in this fintech diaspora.
"I see a lot of messages from other fintechs and even some banks saying, great, this is an opportunity for us to get some resources that were not available," Jimenez said.
The massive fintech layoffs do give banks an opportunity to scoop up talent that's out there, Yang said.
Jimenez pointed out, however, that modern developers used to working in current programming languages may be put off by banks that still have code written in COBOL and C++. They also don't want to work in grungy offices in an industrial park, he noted.
Le predicts that more incumbent banks will acquire fintechs.
"We haven't seen too much of that yet," he said, in part because of a mismatch between sellers, who think they can still raise money at a premium, and the buyers who don't see that.
"I think as this macro environment extends longer and startups and fintech companies start running out of cash, they're going to have to put themselves up for sale or go into the venture capital market and raise," Le said. "As long as this prolongs into 2023, fintech companies will become desperate, unfortunately, and then they're going to have to either raise outside capital or put themselves up for sale. So we do expect next summer or maybe late spring to see mergers and acquisitions pick up."
