2023: Turning the curve

The 'J-Curve' or hockey stick is what differentiates startups from any other business venture. The playbook is familiar: make a grand plan, pitch a load of VCs to secure substantial funding upfront, experiment strategically, and rapidly grow a base of loyal customers. The ultimate goal? To monetise and all sing hallelujah as you witness the hockey stick's upward swing toward profitability.

Intergiro is like any other startup in this respect save for one key difference: we bootstrapped it. That is to say, we never raised a big VC cash pile upfront. Instead, our grand plan was funded with our own private funds and funds of our network. In hindsight, I don’t know what we were thinking.

That said, we had our own hallelujah moment in 2023 when we had our first cash positive month. There is still plenty of work to be done to achieve consistent profitability, but reaching this milestone was a significant validation of our contrarian approach, and puts us in an exceptionally rare position.

Some 2023 headlines

• All time volume and velocity transaction records
• 300% revenue growth
• 50% cost reduction
• Another award in the bag

This was really hard

Growing revenue by 300% while cutting costs by 50% required some very unsatisfying compromises. We had to say goodbye to >50 very talented employees, over 2 separate redundancy rounds.

The first was designed to cut costs fast and happened right after the SVB crisis in March. We concluded that the VC funding market was turning and would not be a viable funding route for us, prompting us to switch to plan B: a sprint to breakeven.

The second round was toward the middle of the year and was more of a precision exercise to try to land the cost side of the P&L (profit and loss statement) in exactly the right place for breakeven.

To handle such a reduction in workforce we had to reduce the amount of work. The only way to do that was to say goodbye to >500 business clients. The AML (Anti-Money Laundering) and operational burden required to keep B2B relationships alive in Fintech is significant (see below for why that is). We had to do a cost/risk/revenue calculation and off-boarded any customers where the remuneration didn’t support the risk profile, leaving us with fewer, larger and more profitable clients but with less operational and compliance overhead.

We also cancelled all ‘blue sky’ research projects to re-channel available resources into tried and tested revenue sources. At the same time we forced our way out of non-optimal long term supplier contracts, deploying some remarkable legal acrobatics in the process.

Why is Fintech so challenging?

Most market commentators would agree that ‘fintech’ as we defined it between 2010-2020 is dead. I wouldn’t say I’m best placed to comment on that, given we never subscribed to that model anyway, but I do think that this business is just harder than people thought, because of the confluence of a few unique features:

• Regulatory Capital (RegCap): unlike most startups, Fintechs are bound by stringent regulatory requirements to maintain a regulated capital buffer. This legal obligation restricts their spending capacity and introduces an added layer of complexity. Confusingly, this problem gets worse as you get more customers!

• Downside client risk: fintechs operate in a realm where every client interaction carries inherent downside risk. Unlike SaaS clients, fintech clients can commit fraud or money laundering, potentially resulting in financial losses. Another way of saying that is that the worst thing that can happen to a SaaS business is just losing a client, taking the revenue from that client to zero, whereas for fintech that client can actually cost money.

• Scale mismatch with counterparties: fintechs must establish partnerships with formidable entities such as Card Schemes, Payment Processors, and Regulators. However, gaining traction and managing these relationships becomes a herculean task when operating at a sub-scale level with minimal leverage. You are just too small from them to care much about your plight. For us just to get contracts with these suppliers we had to promise massive future volume, which when we struggled to reach, we were pinned by massive annual minimum fees. That's what required the legal acrobatics I mentioned above.

To make matters worse, these challenges aren't isolated; they compound to create a hostile landscape where fintechs must work tirelessly just to stay alive. The Regcap requirement creates more pressure to generate revenue, which means you need to take more risk on clients, which puts your already difficult counterparty relationships under more pressure. Bootstrapping makes these issues harder still. Which is probably why nobody does it (until now!).

What is in store for 2024 and beyond?

1. Software is eating Fintech: just like it has been and will eat everything else. Fintech is becoming a layer within this grander tapestry, just like AI and lots of other interesting things like Spatial Reality, Metaverse and Web 3 etc. This is going to create massive value, orders of magnitude more than traditional fintech ever created. 
2. Embedded everything: BaaS and ‘Embedded’ will be the key enablers of this transition, in fact if fintech players don’t have an embedded offering they will get left behind. You could say we are zeroing in on what financial services were always meant to be.. a service.
3. Efficiency will rule: software, and in particular AI is supercharging the race to greater efficiency. Every person, team and company will soon have their own no cost design and dev team. Soon we will have our first 10 person unicorn, then a 1 person unicorn. The BaaS/Embedded players will need to fall in line with this trend, by keeping costs low by getting as ‘close to the metal’ as possible on payments, by removing the middleman (partner banks) and plugging straight into payment networks. PSDII was meant to enable this but some technical settlement finality issues scuppered its efforts, PSDIII is due to fix that. This will also solve the totally untenable BaaS agency issues that regulators have been taking (understandable) exception to over the last 12/24 months.
4. The money will be in the workflows: with payments getting commoditized and costs being pushed down, the workflows around payments will be more valuable than payments for these embedded players. I.e embedded fintechs will move more into SaaS pricing models that charge for SaaS workflows around the payments.

Intergiro has been built for this world, we plug straight into a branch of the ECB, and are principal members of Visa and MC, so have already removed commercial partner banks from the model and could not get any ‘closer to the metal’ if we tried. We also don’t use agents, and never had, instead taking on the full KYC/Compliance burden in all cases.

The thing that has been missing in our equation was a super tight ICP (ideal customer profile). In last year’s note, I mentioned that we have thousands of businesses waiting to onboard. That was true but we didn’t have a good understanding of who those clients were and why they wanted to work with us. We didn’t even have a good understanding of the clients we had already onboarded! As evidenced by the big 2023 off boarding exercise I mentioned above. 

When you have a horizontal product (i.e that could be used by almost any client), you are faced with a very treacherous trap. Your eyes light up at the size of the market and it's very tempting to say yes to any business that happens to come along. The problem is that if everyone thinks you are ok, nobody is going to love you. Retention will be hard and your product team will get overwhelmed with disparate requests.

Therefore, just because you can do business with anyone and everyone doesn’t mean that you should. Our challenge was/is to ‘verticalise’ our horizontal offering, which we made great progress on in 2023. The 2024 key objectives and roadmap are a reflection of that work.

My absolute focus is to bolster our barebones team so they can deliver on that roadmap. See you on the other side ⚔️ .