overly optimistic business plans, condemns APCR, Financing

Heavy promotional expenses, but the accounts are still in bright red. The Financial Services Banking Police (ACPR) on Tuesday pointed out the business models of certain fintechs, which it considers overly optimistic.

“Many of them still show low – or even no – profitability, often due to the dual effort of commercial conquest and innovation to impose themselves on a highly competitive payments market,” the authority writes in a study. This effort is reflected in particular in personnel costs and external costs, which are much higher than in the originally envisaged development plans. »

More realistic business plans

The ACPR thus targets certain payment or electronic banking institutions, these actors who have experienced very strong growth in the past five years, and benefit from a European directive (PSD2) which has given the sector a boost.

A total of 62 of these establishments – sometimes known by the incorrect term “neobanks” – have been approved and are operating in France. They offer services such as tracking expenses, building a kitty or providing an account to make payments, etc.

If some, like Nickel, are profitable, the ACPR “notes a significant gap between the business plans presented during approval and the results achieved by these new players”. The authority therefore encourages candidates for these approvals to be more realistic in the future.

Chronic lack of profitability

More seriously, the financial police emphasises, several companies (as of 31 December 2020) were no longer able to fulfill their supervisory obligations, i.e. to have sufficient capital. “Remedial measures have thus been taken”, specifies ACPR.

To explain this chronic problem, ACPR does not hesitate to point out one of the dogmas of the world of start-ups: achieving profitability is not a priority when raising funds. “The ability of these new entrants to finance this lack of profitability is therefore largely based on their ability to obtain long-term funding, particularly from venture capital investors. »

An important tap, but one that could one day close. Hence the call to “perpetuate the sources of financing for the activity, including in the event of an unfavorable economic situation that limits the possibilities of raising funds” from venture capitalists. After the health crisis, the war in Ukraine could thus put the nerves of investors – and thus also entrepreneurs – to the test.

Protection of customers’ money

ACPR fires a few arrows in passing at the banking sector, not always very “fair play” with these payment fintechs. The latter, for regulatory reasons, really needs the cooperation of banks… which are sometimes reluctant to provide assistance.

More specifically, due to their activity, payment institutions are obliged to collect deposits from their customers: it can be payment accounts (into which, for example, an amount is deposited for an online purchase), or even a kitty (when you make a donation to support a project or case). In all cases, start-ups have an obligation to secure their customers’ money.

To do this, they need to find a bank that agrees to centralize and park these deposits in a dedicated account, this is called ring-fence.

Banks’ reluctance

Unfortunately, “new players are finding it increasingly difficult to find banks” ready to provide this service, the authority explains. This is a deadly danger for fintechs, as if their clients’ funds are not well protected, they can lose their license to operate.

Banks may have very good reasons for refusing to provide this service, the ACPR acknowledges, particularly if this amounts to a policy of “derisking” (more prudent risk management) on their part.

But “in this regard, the European Banking Authority has also recently reminded that the practice of de-risking, when unjustified, can affect competition and financial stability”, ACPR points out. The latter will therefore in future require that when a bank refuses to offer this ring-fencing service, it must clearly explain its reasons.

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