Financial technology companies depend on licences or partner banks, earn thin margins on large volumes, and can face fraud and credit losses that do not appear until later. Evaluating them means looking beyond growth to compliance and loss rates.
11 min read · Level 4
I think fintech is the sector where the product is least often the thing that decides the outcome. Regulation, partner relationships and losses usually matter more, and they tend to be the parts a growth-focused pitch spends least time on.
Fintech covers payments, lending, banking services, insurance technology and wealth platforms. Several lenses matter across them:
Lens Question Regulation does the company hold licences, or rely on a partner that does Partner dependence what happens if a partner bank or processor ends the relationship Unit economics what does it earn per transaction or customer after costs Losses fraud, chargebacks and credit losses Trust can it survive a security incident or compliance failure
Payments. Revenue often comes from a small percentage of transaction volume:
Payment volume 100,000,000 Net revenue at 0.5% 500,000 Fraud and chargeback losses 100,000 Revenue after losses 400,000
Large volume can produce modest revenue, and losses can take a significant share.
Lending. Growth can look strong while credit losses remain hidden, because loans made today may not default for months or years. A lending fintech's true economics depend on losses across a full credit cycle.
Because fintech failures often come from outside the product: a lost banking partner, regulatory action, a fraud wave or credit losses appearing after rapid growth.
It also explains why fintech valuations can move sharply. Small changes in loss rates or regulatory status can change whether a business is viable.
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A consumer lending app growing quickly.
Year 1: lends 20,000,000, early loss rate 2% Year 2: lends 60,000,000, reported loss rate still 2%
The reported loss rate looks stable, but most Year 2 loans are only a few months old. As they mature, losses on the Year 1 cohort have risen to 7%. If Year 2 loans perform similarly, eventual losses would be 7% x 60,000,000 = 4,200,000 rather than the 1,200,000 implied by the reported rate. The growth made losses look lower than they would become.
Judging a lending or payments fintech mainly on volume growth, without examining partner dependence, regulatory status and loss rates by cohort.
Identify which licences the company holds and which partners it depends on, and what happens if one leaves.
Apply take rate or margin, then subtract fraud, chargeback and credit losses.
For lenders, compare loss rates on older loan groups with newer ones.
Ask about regulatory history, audits and the compliance team's experience.
When evaluating payments, lending, banking or insurance technology companies.
Do not apply lending loss analysis to fintechs that take no credit risk, such as some software tools for financial institutions; use the lens that matches the business model.
In 2024, the collapse of banking-as-a-service middleware provider Synapse left many end customers of fintech apps unable to access funds for an extended period, and U.S. banking regulators issued enforcement actions against several partner banks in the sector, as widely reported.
For fintechs relying on partners, ask how customer funds are held and what happens if a partner or intermediary fails.
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