The Growing Pains Of Fintech

Bloomberg says: “It has been 10 years since the last financial crisis, and some have already started to predict that the next one is near. But when it comes, it will likely have its roots in Silicon Valley, not Wall Street.”

Is the roaring success of fintech and alternative finance creating a bubble that could trigger another financial catastrophe?

Whether another crisis is coming and what it’s impact will be is highly debatable. But it’s certainly true that the size of the fintech sector makes it a vital part of developed economies globally. So even a slowdown could be troublesome. And as fintech participants, we should be wary.

Bloomberg points to three reasons why a slowdown – or, as some fear, a meltdown – could occur in fintech sooner rather than later.

First, fintech companies are highly vulnerable to systemic shocks, as most are undiversified and poorly capitalised.

Second, fintech companies, especially start-ups, are hard to monitor and regulate. Thus, a failing company, and its effect on the wider system, is hard to predict.

Third, the fintech community is yet to come up with a system of rules and responses that will govern such a slowdown.

These criticisms of specific companies are valid – but the fear of a financial catastrophe abates when we understand that the vast majority of fintech companies that make up the sector are relatively small and independent. Hence, the risk of contagion from a company to the sector to the wider economy is slim. Unlike the financial crisis of 2007, where housing knocked down credit, which knocked down banking, the siloed nature of fintech means small companies that fail will fail alone. This is reassuring. Of course, we don’t want any companies in our community to fail. But should it happen, it’s better they fail on their own, without contagion to the wider economy.

This said, the weaknesses Bloomberg highlights are significant. Some fintech companies are poorly capitalised and the industry remains notoriously opaque. So it’s important to assess how we, as business owners, can overcome these shortfalls.

‘Fintech’ encompasses a range of companies operating across finance and technology. It’s our opinion that those companies that will run into trouble if conditions tighten (most importantly around valuations and funding) are those that are trying to do too much. Given the uncertain political and economic climate, it’s vital that growing companies prepare for headwinds by doubling down on the solution they offer the wider system.

Companies that are trying to replace the system – which has existed for centuries, populated by incumbents who are also investing heavily in the future – will be most vulnerable to shocks, because in times of crisis, customers will return to the safety of old, trusted, capitalised institutions. It is these companies, with ambitions beyond their product offering, which may be vulnerable.

Robust fintech companies will be ones that enable the wider system by focusing on delivering technologies that service the existing financial community and its customers. And the key to this is product market fit. A company trying to be jack of all solutions but master of none will be exposed in a time of crisis. But a fintech company with laser-sharp focus on a solution delivered via innovative, cost-cutting technology will survive and thrive.

If we, as a community, make the international financial system stronger, upgrading the industry from an old-fashioned, mainframe infrastructure to a 21st Century, decentralised community, we can build new companies and partnerships that will stand the test of time.

Bloomberg ends positively: “Wall Street is no longer the future of finance. Silicon Valley is.”

And, whilst there is a lot of hype around specific companies, our sector as a whole remains in rude health. Outliers will launch, boom, bust and go. But the majority of fintech companies will steadily grow together, provided we follow the laws of the jungle and respect the institutions that still make up the bulk of our industry.

The hegemony of banks won’t end anytime soon. But the prize on offer by helping them to optimise their operations is worth hanging around for.  Those of us working to build robust and successful fintech companies would do well to focus on helping established players do a better job of helping their customers and clients. That way, we all win.