Fintech’s first decade is high on hype and spin but very low on delivering its ‘vision’ of a total disruption of financial services.
Bluntly, fintech to date is not innovative enough and investment is insufficient to deliver a definitive financial-services breakthrough. There is no fintech equivalent of Facebook, Google, Skype or Apple. That is not to say fintech companies won’t be successful and build current ideas into growth oriented start-ups which will be acquired or IPO. But they haven’t to date.
Meanwhile, the sector faces some serious headwinds which will challenge investors, start-ups and those interested in M&A.
Increasing interest rates will challenge the valuations which are currently 50 to 60 per cent higher than other investment categories and will require faster deliver and increased performance.
This is a significant challenge for fintechs given the barriers to building scale quickly in financial services.
The modest level of investment to date - $US43.9 billion - is not enough to create the next financial service giant.
Facebook founded in 2004 with an initial $US500,000 investment by Peter Thiel, IPOed in 2012, is currently worth $US330 billion
To reach the IPO goal, $US2.4 billion, including $US715 million in equity, was raised. The largest fintech sector, P2P lending, has only $US5.2 billion in total investment over nine years.
The P2P example is salient. Launched when money was cheap, the sector has realised it is not quite easy to build a billion-dollar business.
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The incumbents are protected by considerable regulation, have vast resources and will not fall over easily. This is not the taxi industry.
Performance to date is subpar – with major scandals including $US7.6Billion fraud by Ezubao in China, Lending Club and OnDecks stock being trashed due to doubtful lending practices while Prosper lent $US48,000 unsecured to the two San Bernardino terrorists months before the attack.
These incidents feed the narrative start-up lenders do very little that is new or innovative other than offering speed while falling back on existing industry tactics once they have some scale.
The other segments including factoring companies, point-of-sale payments, online services, digital banks and currency exchanges are now a dime a dozen. Most of the ideas are laser focused on a small segment and will not build scale quickly.
Australia is a late starter in fintech with initial momentum only starting in 2014. The market here runs the risk of ramping up investment just as the rest of the world is deflating.
The enthusiastic start-up’s key challenge is the realisation the world is changing and they have to modify their dreams of world domination and accept an M&A outcome and work for a bank.
This in many cases won’t work as the cultures are vastly different between the freewheeling start-ups and banks with their structure, regulation and conservative approach to risk and technology.
Previous aggressive, trend-oriented acquisitions by banks, including monoline mortgage and credit card companies in the 90s and mobile-wallet companies in early 2000s, all ended with faded dreams for all parties. As an investor and participant in the VC sector, my view is fintech in its current state could well repeat this experience.
Grant Halverson is chief executive of McLean Roche Consulting and a former financial services multinational CEO and financial technology CEO. He has been an investor in Fintech for the past five years.