FinTechs Grapple With Regulation Amid Pursuit of Profits

For almost all FinTechs — and especially for publicly traded firms — it has been a bumpy ride these past few years.

Stock prices have been volatile. An overwhelming majority of the names tracked by the FinTech IPO Index trade with “busted” status, or below their initial offering price. Profitability remains elusive, as the cost of doing business is more expensive than it has been in decades.

Sezzle CEO Charlie Youakim and Lemonade Chief Financial Officer Tim Bixby said stanching red ink on the operating line boils down to a few key principles, as they detailed in the last conversation of the continuing “Pivot to Profitability” series.

Profits, said Youakim, “are a scale game — there’s no doubt about it.”

Getting to scale can require shouldering some heavy losses as firms reach critical mass. Lemonade, which offers renters, pet owners, car, life and homeowners’ insurance through its online platform, might be thought of as being consistently unprofitable. That’s by design, Bixby said.

Among the realities of launching in the InsurTech space lies the fact that there are fixed costs, where regulatory and compliance hurdles must be cleared (and consistently satisfied) before bringing products and services to the masses.

“It’s not like you write some code and throw it out into the world,” said Bixby.

Bixby emphasized that the path to Lemonade’s profitability — the major investments are already behind the company — will be paved by a combination of automation that helps spur growth. For Lemonade, growth has been a hallmark of the company’s progress through the years, even though weather-related events and pandemics have roiled the insurance industry. The company has nearly 2 million customers and has committed to being cash flow positive by the end of 2025.

Both executives noted that having gone to market and raised cash when capital was cheaper — raising funds before those funds were needed — have helped sustain Sezzle and Lemonade through the vagaries and challenges of the pandemic and beyond.

Data-Rich AI Native

For Lemonade, the path to consistent profits ties back to technology. Lemonade is “AI native,” Bixby said.

“Our real advantage lies in the depth of data that we collect about each customer when we onboard them and when they get a quote and a policy,” he added.

The flow of data across the platform, as all systems are interlinked (by way of contrast to the back-end systems of traditional insurance giants), allows claims to be paid out in a matter of seconds via algorithms rather than friction-filled human interactions that can take weeks or months, he said.

In June, Lemonade launched its Synthetics Agents program through which venture capital firm General Catalyst funds up to 80% of Lemonade’s customer acquisition costs in exchange for a 16% commission. That, in turn, allows Lemonade to finance its growth without raiding its cash coffers or raising new equity in the markets.

“What we wanted to do was get the benefit of agents from a cost structure standpoint without the cost and the friction that comes with actually hiring and maintaining and training an agent salesforce,” said Bixby.

Along the way, he added, the individual who insures a home might be inclined to buy pet insurance, or vice versa, because the platform reduces the complexities of understanding various insurance products, costs and benefits.

Last year, the company acquired pay-per-mile auto InsurTech Metromile, part of a strategy of selected deal-making that includes saying “no” to most acquisitions, even though at first examination they might seem wildly attractive.

Ninety-five percent of the U.S. market “is in the sweet spot” of the range of various insurance offerings Lemonade provides, said Bixby.

Data, too, underpins Sezzle’s drive to scale the business, said Youakim, who added that cross-selling installment loan offerings to consumers as they continue to use the buy now, pay later (BNPL) platform becomes easier given the information on loan performance and risk management.

“You can sell more and more to them and keep on increasing top line,” Youakim said.

Although Sezzle operates in a different space than Lemonade, it has been examining the use of AI, looking to see how it can torque the efforts of its engineering staff to become several times faster and more efficient so that a project that ordinarily might take days can be boiled down to a few hours. In all cases, AI can cut down on the sheer volume of documents that can clog back-office workflows (even if the documents are digital).

“If you use generative AI and digest 10,000 documents in minutes instead of hours, that presents extraordinary opportunities for us,” Bixby said.

Added Youakim of AI’s potential: Underwriting models can conceivably leap from using machine learning to generative AI, where the latter consumes customer-level data and finds the right offering for a consumer.

“This is definitely something worth looking at and thinking about,” said Youakim.