Fintech, which has made profits from high interest rates, faces key tests

Financial technology companies were initially the biggest losers in 2022 interest rate hikes by the Global Central Bank, which led to a valuation.

However, over time, this change in the interest rate environment has steadily increased the profits of Fintech. This is because higher fees increase what is called net interest income, or the difference between the fees charged on the loan and the interest paid to the saver.

In 2024, several fintechs, including Robinhood, Revolut and Monzo, have driven their bottom line as a result. Robinhood reported annual profit of $1.4 billion, up to $1.1 billion, a jump of 19% of net interest income year-over-year.

Also, Revolut jumped 58% to its net interest income last year, helping to raise its profits to £1.1 billion ($1.45 billion). Meanwhile, Monzo reported its first annual profit for the year ending March 31, 2024, supported by a 167% increase in net interest income.

Now, fintechs, particularly digital banks, are faced with important tests as they raise questions about sustainability, where widespread declines in interest rates depend on this increase in revenue in the long run.

“A climate of declining interest rates can pose challenges for some fintech players with business models fixed on net interest income,” Lindsey Naylor, head of UK financial services at Bain & Company, told CNBC via email.

The decline in benchmark interest rates could be a “test of the resilience of fintech companies’ business models,” Naylor added.

“In some fintechs, lower fees may reveal vulnerabilities, but they also highlight the adaptability and durability of others with a broader income strategy.”

It is unclear how important the decline in interest rates will have a significant impact on the sector as a whole. In the first quarter of 2025, Robinhood reported net interest revenue of $290 million, up 14% year-on-year.

However, in the UK, payment infrastructure startup results suggest the impact of lower fees. Clearbank last year ended with a pre-tax loss of £4.4 million last year, following the transition from interest income to fee-based income, similar to spending related to expansion in the European Union.

“Our interest income will always be an important part of our income, but our strategic focus is on expanding our fee revenue line,” ClearBank CEO Mark Fairless told CNBC in an interview last month. “We expect these fees to drop as we take into account the rate of decline in our plans.”

This is because some fintechs will take steps to diversify their revenue streams and reduce their reliance on income from credit card fees and interest.

For example, Revolut offers crypto and stock trading in addition to payment and forex services, and recently announced plans to add mobile plans to the UK and German apps.

Naylor said “people with a more diverse mix of revenue streams and strong customer base monetization through non-interest services” are “more suited to changing weather in the economy, including lower rate environments.”

The Dutch neobank Bunq, which targets “digital nomads” who don’t like to work from one place, is not too concerned about the prospect of lower interest rates. BUNQ made a 65% jump to annual profits in 2024.

“We’re always getting healthy and diverse incomes,” Bunq CEO Ali Niknam told CNBC last month. BUNQ earns money from subscription and card-based fees and interest.

He added that things are “different in continental Europe than in Britain.” He added that the region has “a long-term negative interest rate.” Therefore, effectively the company had to pay for the deposit.

“Neobanks, with a well-developed and diversified topline, are structurally superior to managing the transition to a lower rate environment,” Barunsing, a fintech research analyst at Peel Hunt, UK investment bank, told CNBC.

“People who rely heavily on interest earned from customer deposits — without adequate traction with alternative revenue streams — face a more meaningful reset in revenue expectations.”