The current fintech phenomenon is starting to feel a lot like the dotcom boom in the late 1990s, and sceptics are saying that it could follow the same path of doom.
Those of a certain age will remember how anyone with half a decent idea (and many did not) was able to get funding, with new internet-based companies seeming to pop up every single week.
Investors and venture capitalists poured money into these internet start-ups with the hope that they would one day become profitable, with many forgoing a cautious approach for fear of not being able to cash in quickly enough on the growth of the internet.
On the other end, these companies spent a truckload of money developing their offer, came up with a funky name, spent even more money promoting and advertising the crap out of their product, then sat back and waited to get rich.
Sadly, for many, this never materialised. Then came the March of 2000, when the dotcom bubble, which had been steadily building up over the past three years, began to deflate. Stocks sank. Companies went bust. Fortunes went down the drain, and the American economy slipped into a gradual mudslide that unfolded into a full-on recession.
Will fintech follow the dotcom’s inglorious end?
According to old-school financial-services investor, J. Christopher Flowers, it very well could. Flowers, a former Goldman Sachs Group Inc. banker who has led over US$14 billion of investment in financial-services companies through his eponymous private-equity firm, is of the opinion that the booming fintech revolution is going to end badly for most start-ups.
While a few new tech companies seeking to win business from established banks and financial-services firms will be extremely successful, the majority will not survive due to fundamental strategic contradiction, Flowers was quoted saying at the Super Return private-equity conference in Berlin in February.
Unlike traditional finance executives, Silicon Valley entrepreneurs hew to “the tech idea that you must get big fast and dominate a sector and achieve a network effect,” he said. “But that isn’t a good approach to finance.”
“In lending, this idea is not only wrong, it is very dangerous indeed. It is one of the oldest adages in our business that the lender that grows fast is the lender with future losses,” said Flowers.
He added that the lack of product differentiation in an overcrowded market space would contribute to the potential failure of these start-ups. For example, the most prolific area for fintech companies was in providing US unsecured consumer loans and that there was a risk of poor lending decisions as offer of credit abound.
“U.S. banks largely do not make unsecured consumer loans so they have left a void,” Flowers said. “Literally hundreds of fintech companies are chasing this market.”
But here’s why fintech isn’t another dotcom
Some say we’ve been here before. But this time it’s different, and here are some reasons why the fintech revolution will differ from the dotcom boom.
1) It isn’t a technical revolution
In the mid to late 1990s, the internet was a relatively new animal, and the companies that sprung up from the revolution did so with hope, ambition and oftentimes, shaky business plans.
Fintech, on the other hand, is NOT a technical revolution. Instead, it is a business-driven model. Getting big fast was key to survival for many dotcom companies. Today, VCs and investors are aware that private investment is a long-term process, where earning a profit would likely take years.
Plus, investors today are not looking for the same type of quick return as many were in the 2000. Many would have learned hard lessons from the dotcom era and are wary.
Finally, fintech places a heavy emphasis on business models with strong fundamentals and companies lacking these features will not likely get funded.
2) Fintech companies are sector-driven
We have seen the likes of Uber and Alibaba use disruptive approaches to transform the way consumers take cabs and access the online marketplace. Similarly, fintech companies are digitally disrupting the financial world and we’ve already seen financial services companies like Fastacash (in Singapore) make inroads into the social and mobile payment market.
The breadth of fintech companies is widely diverse and range from areas like payments, personal finance, P2P lending, insurance, digital banking, equity crowdfunding, and digital currencies. However, they all serve the common purpose of making financial systems and markets more efficient. Though of course, just like any other sector, the key to fintech success is by having a defensible business in the increasingly crowded marketspace.
In comparison, during the dotcom boom, the key yardstick was simply how many customers you had. So, rather than focusing on a specific purpose or function, or in a specific area, early e-commerce dotcoms thought that the most important factor was to get as many visitors to their website as possible and this would eventually translate into profit. Early dotcom businesses also failed to take the time to properly research the market before starting. Needless to say, the “get big fast” proposition didn’t always work out and businesses tanked as a result.
3) The partnership-driven nature of fintech companies render their adaptability and sustainability
While the fintech sun is rising, most of its light is focused on areas left dark by incumbent financial institutions. If you think about it, much of fintech is about servicing the unserviced sectors through mobile wallets.
For the most part, it is an established institution (such as a bank) that enables a fintech start-up to provide any of its new or game-changing services. This very aspect renders the adaptability and sustainability of these companies.
Further, governments across the world are laying the foundations for a strong regulatory and financial support system for the fintech sector.
For instance, the UK government invested £860 million in the National Cyber Security Programme to protect and promote online businesses in the UK. Meanwhile, the US government has tripled investments in accelerators, incubators and competitions to help start-ups connect with potential partners and investments.
In Singapore, the government has invested some S$100 million to fund local technological innovation for early-stage start-ups. In November, Singaporean fintech start-up SoCash was announced as the first fintech start-up to receive backing from the Monetary Authority of Singapore.
Government support helps create an ecosystem that balances the synergy between existing financial systems with fintech innovation. Such an ecosystem would help nurture a strong pool of talent to meet the ever-evolving needs of the fintech industry and in turn, ensures the sector’s growth and long-term sustainability.
What’s your take on the fintech revolution? Let us know in the comments section below!