Economic bubbles seem to be everywhere in the last couple of decades. From the dot com bubble to the Chinese housing bubble, everywhere seems ready to pop. There is no denying that over-inflated and overvalued market segments can pose a significant risk to the economy, but nevertheless, not all bubbles are created equal. Recently there has been much talk of a growing bubble in the fintech sector, and while there is some validity to the claims, there is also a danger of making out the risks to be larger than they actually are.
Fintech may be the new kid in the room, but it’s growing fast and garnering tons of attention. It Fintech is growing so fast, in fact, that there are a few reasons to be concerned. Since 2008, global investment in fintech has jumps from just under one billion dollars to $12 billion in 2014; notable banking executives are ditching their old teams in favour in fintech startups; and new fintech startups and incubators are popping up like mushrooms after rain.
Given all this, it’s understandable why investors might be leery. It wasn’t at all long ago that the world felt the shocks of bubbles bursting, with some of the reverberations still palpable today. Investors, of course, also remember the shattered dreams of a previous generation of startups that were given eye-watering valuations. Yahoo paid $1.1 billion for Tumblr in 2013, before writing down more than half of the social network’s valuation in the following years.
And yet, there are factors at play that should mollify investor fears. To put it bluntly, fintech is simply not that big yet. At the time, Tumblr enjoyed 300 million views per month. By contrast, recent fintech acquisitions seem puny. When Spain’s BBVA acquired US-based Simple in 2014 the digital bank only had some 100,000 customers to its name. The money spent in these acquisitions also pales in comparison. BBVA paid only $117 million for Simple.
There are also deeper, more structural reasons for why fintech isn’t experiencing a bubble, at least not as we usually imagine them. While fintech may be a fancy buzzword, the core of the idea is here to stay. Whatever you may call it, banking — and money in general — are going to change drastically in the coming years. The fintech sector merely exemplifies the paradigmatic change we’re going through. There are great risks to an overvalued market, but this is something different.
In order to stave off a collapse (and inevitable rebirth) of fintech the climate of the financial industry has to change. Currently, the market is saturated with startups hoping to get bought. Banks are indeed buying and incorporating these services into their own offerings, but this is not sustainable. Financial institutions need to stop playing adversarial catch-up, and rather foster an atmosphere of cooperation with fintech startups. If financial giants take these companies under their wings, both sides could profit immensely.
Fintech startups, for their own part, have a lot of growing up to do, and they must do so quickly in order to gain the trust of banks. It is enough to recall the case of Lending Club to understand why the old timers could be wary. But perhaps, more than anything, it is a problem in communication.
“I often meet with banking executives and with these young startups and it’s like they’re speaking different languages. They are talking about the same thing, but they don’t know how to say it to each other. That’s where I come in. Fintech still has a lot of growth in it that is going to waste because the two sides just don’t understand each other. If they can’t learn to do that, the situation could get more risky”, says Eyal Nachum, a fintech veteran and Chairman of the Board at Lithuanian company, International Fintech UAB.
The industry is growing fast, and to keep it stable all partners must be vigilant and active to develop a new framework in which financial interactions take place. Banks especially must develop novel strategies with adapting to this change and to working together with the forces that drive it. Of course, there are risks in every emerging industry, fintech included. Without a doubt, too, there are signs that fintech is experiencing some unbalanced growth. But to call this a bubble would be nothing short of misleading.