Fintech stocks were one of the hottest categories in the market back in 2021. At that time, it seemed that the pandemic might cause consumers to turn from traditional branch-based banking to new digital alternatives.

However, fintech stocks have largely failed to live up to those lofty expectations. While it is one thing to build an appealing finance app, other topics like credit underwriting, deposit gathering, and interest rate curve management can be more challenging for upstart fintech firms to master.

The big banks have also fought back, investing billions in their own apps and digital banking services. At the same time, some fintech firms have collapsed. One example was Synapse, which imploded, leaving thousands of depositors without immediate access to their funds.

While many fintech stocks have rallied in 2024, the positive momentum could be on borrowed time. It’s time to sell these three fintech names before it’s too late.

Dave (DAVE)

Many fintech stocks came about from the SPAC boom. For example, the mobile banking app Dave (NASDAQ:DAVE) was established with the aim of making finances easier.

Dave’s SPAC deal concluded in late 2021 at what proved to be an unrealistic valuation. Shares careened lower almost immediately, and ultimately fell as much as 98% from their initial deal price. Since then, however, DAVE stock has skyrocketed tenfold off the lows.

To the company’s credit, it has curtailed its operating losses and appears to be on track to turn a profit this year. But that could come at great risk.

Much of Dave’s profitability is tied to cash advance services. This form of higher-risk lending can see substantial growth as the economy continues to slump, but can lead to substantial loan losses in a prolonged recession. DAVE stock has had a nice run, but mounting economic headwinds are likely to end the rally by 2025.

Affirm (AFRM)

Unlike Dave, buy-now-pay-later lending service Affirm (NASDAQ:AFRM) has not found a path to profitability.

In fact, Affirm ran up a shocking $1.2 billion loss in fiscal year 2023 on revenues of just $1.6 billion. For a financial services firm, losing nearly a dollar per dollar of revenues is not a great feat.

Fiscal year 2024 will be somewhat less dire, but Affirm is still on pace to lose approximately $800 million in the current year. Analysts see the company remaining deeply unprofitable through at least the year 2026 if not longer.

And all this red ink comes during a growing economy where credit metrics have been relatively healthy. What will happen to Affirm’s lending portfolio if a substantial portion of its credits turn from “buy-now-pay-later” to “buy-now-pay-never?” AFRM stock has rallied sharply over the past 12 months, but traders should get out of this fintech stock before the next recession hits.

SoFi Technologies (SOFI)

SoFi Technologies (NASDAQ:SOFI) is a financial services company that has made a growing mark in the lending space.

It got its start from student loans, but it has expanded to a variety of other banking and credit products. However, student loans continue to be a headache for SoFi, with the Biden Administration announcing another loan relief plan in recent days. Other lenders are exiting the student loan industry due to regulatory uncertainty, which speaks to the challenges SoFi may face in coming years.

KBW recently cut its outlook for SOFI stock, citing a worrisome trend in the net charge-offs (NCOs) of its outstanding loans. Like with Affirm and Dave, SoFi faces meaningful risk if the economy turns downward, particularly as its loan book is already showing some signs of credit stress.

SoFi should be applauded for reaching profitability. This fulfilled management’s earlier promise. However, shares still trade at a large premium to book value. This makes the stock vulnerable to a major correction heading into an economic slowdown.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.