Investment keeps flowing into start-ups that are missioned to disrupt financial technology and break banks. The way we obtain loans, invest, accept and make payments is being challenged and disrupted by clever minds all around the globe…but is there an end in sight?
Perhaps not, but a halt is probably coming, as the tech-bubble that’s building up in Silicon Valley is showing signs of being close to bursting – which would undoubtedly seal the fate of many promising (but overvalued) unicorns. Of the over 100 frequently mentioned unicorns a good portion is in the FinTech space and investors in these might have to visit the barber soon for a haircut, as recently demonstrated by Square’s 30% IPO discount from its latest VC valuation.
Much is written these days about the build-up of a tech-bubble as well as the counterarguments defending their valuations; why this time it is different from the dot-com era and that the unicorns have sounder financials, business models and cash-burns that don’t emit heat! Your underwriter remembers those articles from 1999 and doesn’t think many of the dot-unicorns will keep their horns.
Many entrepreneurs have been drawn to FinTech problems in the last few years and technology advancements play a part in that, but high valuations should certainly get some of the credit. FinTech itself is not new and has been around for centuries, whereby financial institutions (FIs) have relied on third-party IT companies for systems and innovation. Therefore, what is different now within the FinTech industry is perhaps that the FinTech start-ups are selling directly to the end-customer instead of white-labelling their solutions to FIs…as well as the fact that there are more companies in this space, challenging the models and re-thinking processes.
If (or when) the bubble bursts, many of these FinTech start-ups will be short of cash and tempted to direct their efforts back into white-labelling and teaming-up with the FIs they were trying to replace. That will not mean that there won’t be disruption in financial technology, but rather that the “disruption” may be more like a technology refresh and will be led by the very FIs that were supposed to go the way of the dinosaurs.
When the dot-com bubble burst, there was a lot of money lost on the markets, yet the knowledge wasn’t lost and the world was changed forever. We even made a name for the subsequent disruptive web technology and called it ‘web 2.0’. The end of the banks is probably not near, with some rough seas ahead, but the effect of the FinTech start-up activity will most definitely be felt for a long time…next in the form of FinTech 2.0.
* Credit for terming the post-bubble FinTech industry “FinTech 2.0” must go to Chris Skinner, for when sharing the above views at a Handpoint dinner party at Money2020 recently his immediate reaction to these thoughts was: “If you are right, then we will witness FinTech 2.0”