Fintechs face particular challenges. For start-ups, the key challenge is scale and customer acquisition. For bigtech, like Amazon or FaceBook, the challenge is trust.
Banks may not be liked but they are trusted to preserve people’s money and personal data. For fintechs of all size, regulators and governments are likely to err on the side of lower risk, shielding incumbents.
Protect the consumer
As BankMobile founder Luvleen Sidhu told the Wharton Business School’s Knowledge@Wharton, slower adoption of radical banking in US “is partly because of the regulatory environment”.
“It’s very difficult for fintech players or non-banks to enter into the banking space here,” he says. The reason is to protect the consumer. But it creates a lot of entry barriers for innovators in this space.”
Halverson’s take is the fintech world, despite being such a hot sector, actually hasn’t attracted enough money to make a difference and the outlook is not conducive to much greater investment.
“Competition and increasing interest rates will challenge the valuations which are currently 50-60 per cent higher than other investment categories and will require faster delivery and increased performance,” he says.
“This is a significant challenge for fintechs given the barriers to building scale quickly in financial services.”
Halverson argues the “modest” level of investment to date at $US53.9Billion is not enough to create the next financial giant. He points to Facebook, founded in 2004 with an initial $US500,000 investment by Peter Thiel, which then had 11 funding rounds with $US2.3 billion invested prior to its 2012 IPO.
“Its current market cap is US$520 billion,” he says. “The largest fintech sector, P2P lending, has only $US6.2 Billion in total investment over nine years with market cap of $US3.6 Billion.”
But it would be wrong – and this is certainly not Halverson’s argument – to say fintech innovation is not going to radically change financial services. It will – from inside more than outside.
The way traditional banks in Australia responded to (and eventually bought) the main non-bank mortgage originators which overturned home lending in the 90s. Or indeed how Apple has grown by acquiring the technologies we now assume to be Apple innovations via companies like Beats Electronics, Turi, Quattro Wireless or Anobit.